Housing Bill Has Something for Nearly Everyone

Here are some of the new benefits:

 

RENEGOTIATING MORTGAGES Part of the bill is devoted to the creation of a program that may allow some people to cancel their old mortgage loans and replace them with new fixed-rate loans lasting at least 30 years.

The amount of the new loans would be no more than 90 percent of what their property is actually worth now.

 

So who is eligible? You need to have originated your troubled loan or loans on or before Jan. 1, 2008. The loans in question must be on your primary residence. Vacation homes and investment properties are ineligible. You will also need to verify your income, which many borrowers did not have to do in recent years.

 

Also, as of March 1, 2008, your monthly housing payment (including the principal on all your various mortgage payments, interest, taxes and

insurance) has to have been at least 31 percent of your monthly household income. So if you were earning $5,000 a month and had housing payments of $3,000, you are eligible. But if you had payments of just $1,400, you would not be, presumably because that loan is affordable given the size of your income.

 

Lenders, however, are not required to give you a better deal under the new law, even if you do meet the qualifications. They may not be willing to negotiate unless they think you are truly on the cusp of foreclosure.

If you manage to get a new loan, you cannot take out a home equity loan for at least five years after you get the new mortgage. You will also have to pay a 1.5 percent fee each year on the remaining balance.

Finally, you have to hand over no less than 50 percent of any appreciation on the home to the government once you sell. Sell the house in less than five years, and you will have to turn over as much as all of the gain.

 

This program ends on Sept. 30, 2011. While it does not officially take effect until Oct. 1, lenders may be willing to start their negotiations with borrowers now.

 

BREAK FOR FIRST-TIME BUYERS If you are buying a home for the first time, and it is your primary residence, you are eligible for a federal tax credit of $7,500 or 10 percent of the purchase price, whichever is smaller. With a tax credit, you subtract the credit amount from the total you would otherwise pay to the Internal Revenue Service <http://topics.nytimes.com/top/reference/timestopics/organizations/i/int

ernal_revenue_service/index.html?inline=nyt-org> . So if you owe $1,500 and you qualify for the credit, you would end up getting a $6,000 refund.

 

There are two big catches, though. If you earn a modified adjusted gross income of more than $75,000, or $150,000 if you are married and filing your tax return jointly, the credit starts to phase out. For single people, it phases out completely at $95,000 of annual income, while for married people filing jointly, it phases out at $170,000.

 

But you have to pay back the credit over the next 15 years, in equal amounts each year when you pay your federal taxes. That makes this more like an interest-free loan than a true credit. According to the National Association of Realtors <http://topics.nytimes.com/top/reference/timestopics/organizations/n/nat

ional_association_of_realtors/index.html?inline=nyt-org> , there were about 2.5 million first-time home buyers in 2007. A large proportion of them would have qualified for this credit, but whether it is enough to push would-be buyers over the edge this year remains to be seen.

 

The tax credit is retroactive to home purchases on April 9, 2008, and expires on July 1, 2009. If you purchase a home from Jan. 1, 2009 to June 30, 2009, you can claim the tax credit on your 2008 tax return.

 

ADDITIONAL DEDUCTION If you are a homeowner who takes the standard deduction on your federal income taxes and does not itemize, this one is for you. You can now take an additional federal tax deduction of $500, or $1,000 if you are married and filing your tax returns jointly. Again, this one is gravy; you get it in addition to the standard deduction.

 

Since itemizers are often people who pay a lot of mortgage interest, this deduction will generally benefit people who pay little or none, like those who have paid off their mortgages entirely or close to it.

There is one hitch here: you will need to report the property taxes you paid on your tax form. If they are less than $500 (or $1,000 if you are married and filing a joint return), your deduction will be limited to the amount of the property tax you paid.

 

 

REDEFINITION OF JUMBO LOANS Often, if you want the mortgage loan with the lowest possible interest rate, it has to be small enough to be purchased by Fannie Mae <http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.

html?inline=nyt-org>  or Freddie Mac

<http://topics.nytimes.com/top/news/business/companies/freddie_mac/index

.html?inline=nyt-org>  from whatever bank or other institution originated it.

 

Under the new bill, Fannie and Freddie have permanent authority to buy bigger loans in areas with high housing costs. (Temporary measures allow them to buy bigger loans, but those expire on Dec. 31.) They can buy loans up to 115 percent of the local median home price, though they cannot buy any loans larger than $625,500. Any larger loan will generally be a jumbo loan, which will cost more in interest.

 

A BREAK FOR VETERANS Lenders will have to wait nine months, instead of 90 days, before beginning foreclosure proceedings on homes owned by someone returning from the military. Lenders must also wait a year before raising interest rates on a mortgage held by someone returning

from military service  

 

These provisions expire on Dec. 31, 2010. 

 

How The New Housing Rescue Bill Can Help Your Clients

2008

The House is expected on Wednesday to pass a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac.  If the bill is then passed by the Senate and signed by President Bush, who today withdrew his threat to veto the legislation, thousands of at-risk borrowers will be able to refinance their unaffordable old mortgages into new, low-cost fixed-rate loans insured by the FHA, Federal Housing Administration.

 

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program, but the bill allows for as many as one or two million borrowers to participate.

 

Who’s eligible?

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must spending at least 40% of their gross monthly income on all household debt to be eligible for the program They can be up-to-date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage – and attest that they are not deliberately defaulting just to obtain lower payments. Before a homeowner can get an FHA-backed mortgage they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity

loan for at least five years, unless it’s to pay for necessary upkeep on the home. To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.

 

How can I apply?

Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.

 

How does the refinancing process work?

This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home’s current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial

loss for the lender. But lenders won’t sign off on a workout unless they think that they’ll lose less money on that than they would by allowing a home to go through the costly foreclosure process. Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home’s current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.

 

Based on that new appraised home value, the FHA lender determines how much the original lender has to reduce the original mortgage by, so that it will reflect 90% of the home’s market value. If the original lender agrees to the write down, the new lender buys the old loan and takes over the reworked mortgage. As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally it pays the FHA an up-front premium equal to 3% of the mortgage principal.

 

What does it cost?

There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate. However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually. Borrowers also agree to share any profits from future home price appreciation with the FHA. To do that, they’ll pay a “3% exit fee” of the mortgage principal to the FHA when they resell or

refinance. Plus, they’ll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs. After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

 

What will I save?

Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even factoring in the FHA fees.  In areas that have sustained huge price drops, such as Sacramento, where prices have fallen about 30% over the past year, some loans might be reduced by more than 40%.

 

Additionally, the FHA loans carry reasonable interest rates which are fixed for the life of the loan, as opposed to a subprime adjustable rate mortgage that can jump higher every six months.

 

By Les Christine, CNN Money.com, Staff Writer

 

http://www.fha.com/application_ml.cfm?PPCID=102

FHA waives 90-day anti-flipping rule

 

 

 

In an effort to facilitate the sale of bank-owned properties, the Federal Housing Administration (FHA) has temporarily suspended its 90 day rule against flipping properties. Under the anti flipping rule, the FHA will not insure a mortgage loan if the sales contract is executed within 90 days of the seller’s acquisition of the property. Effective June 9, 2008, the anti flipping rule has now been waived for one year for properties acquired by lenders, their subsidiaries, and their outside vendors.The purpose of FHA’s new policy is to facilitate the sale of bank-owned properties, given that foreclosed and abandoned homes harm neighborhoods and delay a community’s recovery.  However, FHA still requires homes to be“safe, secure, and sound,” which may not be the condition of certain foreclosed-upon properties.For more information about the waiver of FHA’s anti flipping rule, go to www.fha.gov. For general information about bank-owned property transactions, see C.A.R.’s legal article entitled REO Transactions at http://qa.car.org.

2008 FHA TIPS

Bankruptcy Update:

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy.  Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations.  The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs.  An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.  Additionally, the lender must document that the borrower’s current situation indicates that the events that led to the bankruptcy are not likely to recur.

 

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time).  In addition, the borrower must receive permission from the court to enter into the mortgage transaction. 

 

Cash-Out” Refinances. 

“Cash-out” refinances are only permitted on owner-occupied principal residences and are limited to a combined LTV (FHA-insured first and any subordinate liens) of 95 percent of the appraised value, provided the property has been owned by the borrower for at least one year.  If the property was purchased less than one year preceding the loan application, the mortgage amount must be calculated using the lesser of the appraised value or the original sales price of the property multiplied by 95 percent.  Properties owned free and clear may be refinanced as cash-out transactions.

 

“Cash-out” refinances for debt consolidation represent considerable risk, especially if the borrowers have not had an attendant increase in income.  Such transactions must be carefully evaluated.

 

Self-Employed Borrowers.  A borrower with a 25 percent or greater ownership interest in a business is considered self-employed for FHA mortgage loan underwriting purposes.

 

The following conditions apply to underwriting self-employed borrowers:

 

A.      Minimum Length of Self-Employment.  Income from self-employment is considered stable and effective if the borrower has been self-employed for two or more years.  The high probability of failure during the first few years of a business makes the following requirements necessary for individuals who have been self-employed less than two years:

 

1.      Between One and Two Years.  An individual self-employed between one and two years must have at least two years of documented previous successful employment (or a combination of one year of employment and formal education or training) in the line of work in which the borrower is self-employed or in a related occupation to be eligible.

 

2.      Less than One Year.  The income from a borrower self-employed less than one year may not be considered effective income.

 

Commission Income.  Commission income must be averaged over the previous two years.  The borrower must provide copies of signed tax returns for the last two years, along with the most recent pay stub.  (Unreimbursed business expenses must be subtracted from gross income.) Individuals whose commission income shows a decrease from one year to the next require significant compensating factors to allow for loan approval.  Borrowers with commission income received for more than one but less than two years may be considered favorably provided the underwriter is able to make a sound rationalization for acceptance and can document the likelihood of continuance.

 

Commissions earned for less than one year are not considered effective income.  Exceptions may be made for situations in which the borrower’s compensation was changed from a salary to commission within a similar position with the same employer.  A borrower also may qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage.

 

Delinquent Federal Debts.  If the borrower, as revealed by public records, credit information, or HUD’s Credit Alert Interactive Voice Response System (CAIVRS), is presently delinquent on any Federal debt (e.g., VA-guaranteed mortgage, Title I loan, Federal student loan, Small Business Administration loan, delinquent Federal taxes) or has a lien, including taxes, placed against his or her property for a debt owed to the U.S., the borrower is not eligible until the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing.  Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA-insured mortgage.  If any regular payments are to be made, they must be included in the qualifying ratios. 

FORECLOSURE RELIEF BILL BECOMES LAW

This week, the State Legislature enacted foreclosure reform law to

address the adverse effects of high foreclosure rates in California. The

new law requires lenders to contact homeowners to explore options for

avoiding foreclosure at least 30 days before filing a notice of default.

It also requires owners acquiring property through foreclosure to

maintain the exterior of vacant residential properties. The new law also

extends from 30 to 60 days the time for residential tenants to move out

of properties that have been foreclosed upon, unless other laws apply.

These requirements will remain in effect until January 1, 2013. The full

text of Senate Bill 1137 (Perata) is available at www.leginfo.ca.gov

<http://www.leginfo.ca.gov/> .

 

Highlights of the new law are as follows:

 

- Contact Between Lender and Borrower: Effective on or about September

8, 2008, a lender, trustee, or authorized agent may not file a notice of

default until 30 days after contacting a borrower to assess the

borrower’s financial situation and explore options for avoiding

foreclosure. A lender must generally contact the borrower in person or

by telephone, or satisfy due diligence requirements for contacting a

borrower. During the initial contact, the lender must inform the

borrower of the right to request a meeting with the lender within 14

days. The lender must also give the borrower the toll-free number for

finding a HUD-certified housing counseling agency. A subsequent notice

of default must include the lender’s declaration that it has contacted

the borrower, tried with due diligence to contact the borrower, or the

borrower has surrendered the property. A lender who had already filed a

notice of default before the enactment of this law must include a simila

r declaration in the notice of sale. This requirement to contact

borrowers applies to loans secured by owner-occupied residences made

from 2003 to 2007. Certain exemptions apply if the borrower has filed

for bankruptcy, surrendered the property, or contracted with a person or

entity whose primary business is advising people, who have decided to

leave their homes, on how to extend the foreclosure process and avoid

their contractual obligations.

 

- Maintenance of Vacant Properties: Effective July 8, 2008, anyone who

acquires property through foreclosure must maintain the exterior of

vacant residential property. Violations of this law include permitting

excessive foliage growth that diminishes the value of surrounding

properties, failing to take action against trespassers or squatters,

failing to take action to prevent mosquitoes from breeding in standing

water, or other public nuisances. This law authorizes a governmental

entity to impose a civil fine up to $1,000 per day for any violation, as

long as the owner has been given notice and an opportunity to remedy the

violation. A violator must be given at least 14 days to begin, and 30

days to complete, such remediation before a fine can be assessed.

 

- 60-Day Notice to Terminate Tenants: Effective July 8, 2008, a tenant

or subtenant in possession of a rental housing unit that has been sold

through foreclosure is generally entitled to a 60-day written notice to

quit, not just 30 days. However, a borrower who remains on the property

after foreclosure may be served a three-day notice to terminate. This

law does not affect, among other things, rent-controlled properties with

just-cause evictions. Effective on or about September 8, 2008, the

lender, trustee, or authorized agent posting a notice of sale must also

post and mail a specified notice of a tenant’s right to a 60-day

eviction notice from the new owner, unless other laws apply. This

requirement to notify tenants of their rights applies to loans secured

by residential real property where the borrower has a different billing

address than the property address.

 

FHA waives 90-day anti-flipping rule

In an effort to facilitate the sale of bank-owned properties, the Federal Housing Administration (FHA) has temporarily suspended its 90-day rule against flipping properties. Under the anti-flipping rule, the FHA will not insure a mortgage loan if the sales contract is executed within 90 days of the seller’s acquisition of the property. Effective June 9, 2008, the anti-flipping rule has now been waived for one year for properties acquired by lenders, their subsidiaries, and their outside vendors.

 

The purpose of FHA’s new policy is to facilitate the sale of bank-owned properties, given that foreclosed and abandoned homes harm neighborhoods and delay a community’s recovery. However, FHA still requires homes to be “safe, secure, and sound,” which may not be the condition of certain foreclosed-upon properties.

 

For more information about the waiver of FHA’s anti-flipping rule, go to www.fha.gov. For general information about bank-owned property transactions, see C.