August 2, 2008

The FHA and the Housing Bill

In yesterday’s post, I reviewed how the 2008 housing bill will affect the operation of Fannie Mae and Freddie Mac. Today we’ll take a look at what this bill will mean in the operation of the FHA .

Here is a summary of how the Housing and Economic Recovery Act of 2008 will change the way the FHA (Federal Housing Administration) will operate:

• Gives the FHA the authority to lend an extra $300 billion to homeowners who are in economic difficulty. This is expected to help approximately 400 homeowners by providing them with affordable fixed-rate loans. (However, approximately 2.8M homeowners are expected to go into foreclosure by the end of 2009.) Any losses will be covered by the affordable housing account which was also created by this bill. The affordable housing account will be funded by profits from Fannie Mae and Freddie Mac.
  • To participate in these FHA loans, lenders will have to agree to lower the amount that homeowners owe on their home loans.
  • Homeowners will qualify if their mortgage-debt to income ratio is greater than 31%.
  • This refinanced loan cannot be larger than 90% of the home’s value.
  • Borrows will be required to prove that they can repay the loan.
  • This program starts October 1, but anyone interested is encouraged to start the process now.
• Allows the FHA to back riskier loans. Another way of saying this is that this bill increases the amount of affordable housing that the FHA can help to provide to the workforce and/or poor. Both of these statements say the same thing, but they also created a different picture of who this bill will help. Take your pick on which one you think is the most accurate.
• Allows the FHA to insure (and Fannie and Freddie to buy) loans up to $625,000 in high-priced areas such as Orange County. Also, allows the FHA to insure loans up to 15% higher than the median home price in some cities. This is a permanent change.
• Bans the FHA from charging premiums to riskier borrowers; this starts on October 1 and lasts for one year.
  Also, bans the FHA from insuring loans in which the seller pays the buyer’s down payment; this ban starts on October 1.

Tomorrow’s post: More housing bill details, including tax breaks offered in the Housing and Economic Recovery Act of 2008