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Delayed but not derailed, the homebuyer tax credit won a Congressional last week, as the House and Senate agreed to expand and extend the popular program into next year. Absent Congressional action, the credit would have expired November 30.

Included in a broader measure extending unemployment benefits, the tax credit provision keeps the current $8,000 credit in place for first-time buyers who purchase homes by April 30 and close on them by June 30 of next year. The legislation also expands the program, currently limited to first-time buyers, by offering a $6,500 credit to trade-up buyers, who have owned their existing home for at least five consecutive years out of the previous eight.

The legislation caps the maximum purchase price at $8,000 but it expands the income limits to $225,000 for married couples and $125,000 for single individuals, up from $150,000/$75,000 under the existing program. Responding to reports of widespread abuse and fraud related to the existing credit, lawmakers tightened some of the program guidelines, setting a minimum age (18) for applicants, barring homes purchased from relatives, and requiring taxpayers claiming the credit to submit settlement statements to document their home purchase.

The Congressional Budget Office has estimated that the expanded credit will cost approximately $10 billion on top of the $10 billion already spent on the program. Critics argued that the incentive amounts to an expensive and unnecessary “gift” to buyers who would have purchased homes anyway. But housing industry executives lobbied furiously to preserve the program, arguing that it has helped to bolster the sagging housing market and warning that its expiration would undermine a fragile housing recovery. When new home sales declined unexpectedly in September, industry lobbyists said it reflected uncertainty about whether the credit would be extended.

The National Association of Realtors (NAR) has estimated that of the 1.4 million taxpayers who have claimed the credit thus far, as many as 355,000 to 400,000 purchased their homes solely because of the financial incentive. Nearly one in five prospective first-time buyers responding to a recent poll said the continued availability of the credit would be a primary factor in their decision to purchase a home next year.

Goldman Sachs analysts, writing in a recent research report, agreed that the credit has spurred home sales this year (although not as many as the NAR has estimated), but they also questioned the benefit of expanding the credit to existing homeowners. Trade-up purchases won’t do anything to reduce the overhang of unsold homes, the report noted, because “every buyer taking advantage of the move-up credit would necessarily be a seller.”

In addition to extending the tax credit, lawmakers voted separately to keep in place a temporary increase in the conforming loan limits governing mortgages purchased by Fannie Mae and Freddie Mac. A provision in the Housing and Economic Recovery Act of 2008 raised the ceiling to $625,000 (to a maximum of nearly $730,000 in high-cost areas), but those limits were scheduled to roll back to $417,000 and $625,000 at the end of this year.

Industry executives argued successfully that, like the anticipated expiration of the tax credit, the pending a of the loan ceilings was undermining home sales. “Some lenders have stopped underwriting certain loans at the current interest rate because lenders are uncertain they will be able to sell the loans,” a coalition of industry trade groups warned in a letter to the House and Senate leaderships. “In light of the continuing weakness in the secondary market,” the letter continued, “we urge Congress to take action so the GSEs and the Federal Housing Administration can be permitted to continue providing capital to support loans to families across America.”

Lawmakers did just that at the end of October, voting to keep the temporary loan limits in place through the end of next year.

FORECLOSURES PREVENTED OR DELAYED?

The most recent statistics on the Administration’s Home Affordable Modification Program (HAMP) indicate that the pace and number of loan modifications are increasing. (See related news item.) But the critical question, as even the program’s strongest supporters acknowledge is this: Will the temporary loan modifications lenders are approving today become permanent? Or is this program, which is intended to prevent foreclosures, simply deferring them instead?

The most recent “Mortgage Metrics Report,” produced jointly by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, is not encouraging. According to that report, more than half of the loans modified in the third quarter of 2008 were seriously delinquent after 9 months; 46.2 percent were delinquent after 6 months and 30.8 percent were in arrears after 3 months. Fourth quarter modifications performed better, with 40.8 delinquent after 6 months and 28.1 percent after 3 months. The report attributed the improvement largely to the increase in the number of modifications that reduced borrowers’ monthly payments: 78 percent did so in the second quarter compared with only 50 percent in the first quarter.

Equally important, the OCC/OTS report noted that the number of modifications that reduced the principal balance – a solution that, some industry analysts say, is essential to make foreclosure relief permanent rather than temporary– nearly tripled in the second quarter. Even so, debt reductions still represented only 10 percent of all loan modifications during the second quarter review period.

Of the more than 71,000 modifications booked between January 2008 and March, 2009, the OCC/OTS report noted, monthly payments increased on 27 percent and were unchanged on about the same number. Even the loans on which payments decline provide only temporary relief; then “[the payments] go up again,” Alan White, a professor at Valparaiso University School of law, told USA Today. White, who has studied subprime mortgages and foreclosure trends for the past decade, has emerged as a leading critic of the banking industry and most loan modification efforts. “Lenders focus on today and not on the future,” he complains. “Even under the Obama plan,” he told USA Today, “They don’t focus on permanent debt reduction.”

MINORITY STRAINS

Turmoil in the mortgage lending arena has affected just about everyone, but not equally. Tighter lending policies and a shrinking supply of credit have hit minority borrowers hardest, disproportionately increasing the rate at which their loan applications are denied and reversing recent gains in minority homeownership rates.

According to the annual Home Mortgage Disclosure Act data reported by financial institutions, Blacks received only 6.3 percent of all mortgages originated in 2008, down from 8.7 percent in 2006; the share for Hispanics declined from 12.1 percent to 8.5 percent, while the market share for white borrowers increased to 69.1 percent from 62.7 percent. Those statistics largely reflect the virtual disappearance of subprime mortgages, on which minority borrowers relied heavily, analysts said.

Reflecting the tough recessionary climate, loan denial rates increased to nearly 33 percent of all applications from 29 percent in 2006, but denials for Blacks and Hispanics were nearly twice the rates for white borrowers, continuing a trend that has been reflected consistently in the annual HMDA reports.

Originations of high-priced loans also declined overall, from 29 percent in 2006 to only 12 percent in 2008. But minorities continued to receive a disproportionate share of those loans, representing 17.1 percent of originations to Blacks and 15.4 percent for Hispanics, compared with 6.5 percent for whites.

As conventional loan originations declined, FHA-insured loans filled the gap, accounting for 19.6 percent of originations in 2008 compared with just 5.5 percent in 2007; minorities, again, relied disproportionately on this financing. Half the home purchase loans obtained by blacks were FHA-insured, reflecting a serious imbalance in the mortgage market, according to John Taylor, president of the National community Reinvestment Coalition, who termed that trend “astounding and at the same time worrisome. The government has stepped in where the private sector has withdrawn,” he told American Banker. “But the FHA cannot replace the private sector in terms of the resources it has available for housing. We need the private sector back in there, but we need to have them making loans in a clean, fair, ethical way.”

CONDOMINIUM MOANING

The Department of Housing and Urban Development (HUD) has delayed until December 7 the effective date for changes in the underwriting standards for FHA-insured condominium loans. This is the second delay for the new guidelines (HUD previously postponed the start date from October 1 to November 2), spurring hopes among lenders and in the condominium industry that the agency will rethink at least some of the new requirements.

Announced about a month ago in a letter to mortgagees, the new policies track many of the guidelines Fannie Mae and Freddie Mac have already adopted for condominium loans, targeting the underwriting lapses that, most agree, contributed largely to the outsized delinquency rates and foreclosure losses with which mortgage lenders are struggling today. But critics say some of the FHA’s changes go too far.

The biggest concern seems to be the elimination of the “spot” approval process for condominium loans. Under the new guidelines, the FHA will no longer insure condominium loans individually; the condominium project must be certified as compliant with FHA standards and that certification must be renewed every two years. So even projects that currently have FHA certification will have to be re-certified – a costly and time-consuming process that, critics say, will burden community associations, create liability risks for lenders (which can certify projects under the FHA’s delegated approval process), and create a huge review backlog at HUD. Other changes in the FHA standards:

Establish a 30 percent cap on the percentage of units in a community that FHA will insure;

  • Require community associations to update their reserve studies annually; and
  • Limit the commercial use in a residential condominium to no more than 25 percent of the floor area.
  • The Community Associations Institute (CAI), which represents the common interest ownership industry, has joined other real estate industry trade groups in asking HUD to delay the new FHA standards for at least 120 days to more fully consider the impact on condominiums and the real estate market generally.

“The new regulations will create significant impediments to the resale of existing condominium housing stock, increase costs for existing condominium association owners, push more families into financial distress, and impede sales in new condominium developments, Thomas Skiba, chief executive officer of CAI, said in a letter to HUD detailing the association’s concerns. “While CAI strongly supports efforts by FHA and other entities to ensure long-term stability in the mortgage insurance process,” Skiba emphasized, “emerging indications from our members suggest that the FHA proposal will actually serve to further destabilize the housing market.”

Recent press reports indicate that HUD may, in fact, be poised to address at least some industry concerns. After meeting with HUD officials two weeks ago, officials from the Mortgage Banking Association (MBA) told Inman News that the agency has agreed to dump the recertification requirement for projects currently on the FHA’s approved list and will increase the proposed insurance concentration limits from 30 percent to 50 percent, going up to 100 percent in “well-established” projects that meet specified reserve funding requirements.

HUD officials have not confirmed those changes, nor have they confirmed the MBA report that the implementation date will be delayed until January.

RETIREMENT RISKS

Count retirement savings among the victims of the economic downturn. Stock market losses and declining home values have forced many Americans, who thought they were well-positioned for retirement —or heading in that direction ¾ to rethink that assumption. More than half of U.S. households could not maintain their current standard of living if they retire at age 65 – a significant setback compared with the 44 percent deemed at risk just two years ago.

Those calculations are based on the National Retirement Risk Index, developed jointly by the Center for Retirement Research (CRR) at Boston College and Nationwide Mutual Insurance Company.

“The real problem behinds this is that so many households were dependent on their home values,” Paul Ballew, senior vice president of customer insights and analytics at nationwide, told Bloomberg News. “[Now that] home prices have come back down to normal levels,” he noted, “we realize we don’t have adequate savings.”

Home values have declined nationally by more than 20 percent since 2006, while the average balance of 401 (k) retirement accounts plummeted by nearly 30 percent last year. The personal savings rate would have to increase from its current level – about 3 percent of disposable income – to between 8 percent and 10 percent to make up that lost retirement savings ground, according to the a CRR analysis of the retirement index reading.

“Even if the stock market should bounce back, the housing bubble is unlikely to reappear,” that analysis points out. “And as defined benefit plans fade in an environment where total pension coverage remains stagnant, Social Security’s Full Retirement Age moves to 67, and life expectancy increases, the outlook will get worse over time. The [retirement risk index] clearly indicates that this nation needs more retirement saving.”