H.R. 3221 Housing and Economic Recovery Act of 2008 Passes New Permanent Loan Limits

The House passed the massive housing bill last Wednesday, the senate voted Saturday to send it to the president and today President Bush signed the “Housing and Economic Recovery Act of 2008 HR 3221.”

HR 3221 is intended to aid in stabilizing our economy, support first-time homeowners and provide mortgage relief for an estimated 400,000 struggling homeowners. All this with a cost of $680 million over 10 years.

Hoping to provide mortgage relief this bill will allow troubled homeowners, who owe more on their mortgage than the property is currently worth, refinance into more affordable government-backed loans (FHA) rather than losing their homes.

Borrowers will need to show that they could afford the new loan. The caveat here is banks will have to agree to write down existing mortgages to 85 percent of their current appraised value in order to get a new FHA 30-year fixed mortgage at 90 percent of the appraised value. By agreeing to take a loss, lenders could prevent losing even more money in the foreclosure process.

The loan limit for this FHA foreclosure rescue program is $550,440 nationwide and is effective on October 1, 2008.

If borrowers later decided to sell the property at a profit, they would have to share 50 percent of all future appreciation with the FHA.

In order to stimulate homeownership, the bill permanently increases the conforming loan limit that Fannie Mae and Freddie Mac can buy from $417,000 or 115 percent of the local area median home price up to $625,500. The loan limit that FHA can insure will be permanently increased from $271,050 or 115 percent of the local area median home price up to $625,500.

These new loan limits will be effective at the expiration of the “Economic Stimulus Act of 2008 HR 5140” temporary limit ($729,750) on December 31, 2008.

William Brown, president of the California Association of Realtors, said “Although we would have liked Congress to make permanent the (temporary) $729,750 loan limit, C.A.R. is pleased with the new permanent loan limit of $625,500. It will allow California homeowners to refinance their loans into safe affordable loan products and allow first-time home buyers to enter the market.”

Hoping to bring movement into the market, first time homebuyers or those who have not owned a home for three years will receive a tax-credit worth up to 10 percent of a home’s purchase price, up to a maximum of $7500. This credit is available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit will be in a form of an interest-free loan repayable in 15 years.

Married couples filling seperately will only receive $3,750 and unmarried buyers who jointly purchase a home will receive the full $7,500 credit. However, eligibility begins to phase out single filers with adjusted income of more than $75,000 and $150,000 for joint filers. It completely phases out at $95,000 for singles and $170,000 for married couples filing jointly.

Another provisions relating to FHA modernization include streamlined processing for FHA condos, reforms to the home equity conversion (reverse) mortgage program, and reforms to the FHA manufactured housing program

However, other provisions of HR 3221 relating to FHA may be hurting the chances for some home buyers.

The down payment requirement on FHA loans will go up from 3 percent to 3.5 percent.

Previously all borrowers regardless of their credit paid 1.5 percent of their loan balance on upfront premiums fees for FHA insurance. Effective October 1, 2008 through September 30, 2009 the new pricing structure will have upfront “risk-based” premiums range from 1.25 to 2.25 percent.

Also effective October 1, 2008, down payment assistance programs funded by sellers or homebuilders and funneled though a non profit will no longer be allowed. However, other assistance programs provided by nonprofits funding will still be allowed.

Another provision in this bill is the set up of the first national licensing and registration system for mortgage brokers and loan officers. With the purpose of preventing fraud, it will set minimum licensing requirements, education requirements and mandate fingerprinting for loan originators. Each State will have the ability to implement stricter laws. However, those who only perform real estate brokerage activities and are licensed or registered by a state are exempt; unless they are compensated by a lender, mortgage broker, or other loan originator.

The last provisions, according to the summary by NAR, include a temporary increase in the loan limit for the Veterans Affairs (VA) home loan guarantee program to the same level as the Economic Stimulus limits though December 31, 2008. It authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages and the Community Development Block Grant Program will receive $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.