A sweeping housing measure signed into law last week by President Bush is a boon for all current or aspiring homeowners, promising to provide increased access for first-time buyers to mortgage financing, particularly in high-priced areas such as here in California; tax credits for first-time buyers; and much-needed stabilization of the nation’s turbulent financial markets.
“This federal housing package represents a significant move in the right direction for California homeowners,” said California Association of Realtors (C.A.R.) President William E. Brown. “The measure will not only help thousands of borrowers facing financial trouble stay in their homes, but pave the way for thousands more to achieve the dream of becoming first-time homeowners, and help move otherwise skeptical buyers off the fence.”
Known as the Housing and Economic Recovery Act of 2008, this broad legislation will assist an estimated 400,000 homeowners currently facing foreclosure, many of whom reside in California, by allowing them to refinance their current mortgages with a more affordable Federal Housing Administration (FHA)-backed loan. This particular feature of the bill aims to stem the rising tide of foreclosures that have been contributing to the downward spiral of home values across the state and creating more stringent lending rules that have made it impossible for many potential buyers even with good credit to purchase a home.
The bill also will permanently increase government backed loan limits in high-cost areas—something C.A.R. has been pushing for its members for some time. The bill permanently increases the conforming loan limit to $625,500. A former measure, The Economic Stimulus Act of 2008, signed in February, raised the conforming loan limit in high-cost areas to $729,750 from $417,000. However, this change was temporary set to expire Dec. 31.
Although a permanent loan limit at $729,750 would have been preferable, the new, permanent loan limit of $625,500 will open the door for many California homeowners hoping to refinance their loans into safe, affordable loan products, and allow first-time home buyers to get back into the market, up and down the state.
“With more buyers able to enter the market, and greater access to affordable loan products that won’t have home buyers struggling six months down the road to make their payments, we can expect to see more buyers coming back into the market,” Brown said. “Increased access to mortgage capital is a key provision of this measure and will significantly improve the options for these first-time buyers here in our state, where home prices remain among the highest in the nation.”
The new loan limits for Fannie Mae and Freddie Mac are the greater of either $417,000 or 115 percent of an area’s median home price, up to $625,500. The new FHA loan limit will be the greater of $271,050 or 115 percent of an area’s median home price, up to $625,500. Both new loan limits will be effective upon the expiration of the former measure’s economic stimulus limits on December 31, 2008.
Another key feature of the bill is a tax credit for first-time home buyers, who may now receive a tax refund worth up to 10 percent of a home’s purchase price, up to a maximum of $7,500. The refund serves as an interest-free loan and the homeowner is required to repay it in equal installments over 15 years. While this sounds nice, it is almost irrelevant here in California where virtually all homes will qualify for only the $7500 maximum.
Steps for lowering the cost of buying a home are critical in a market where the affordability rate, i.e. the percentage of households in California that can afford to buy an entry-level home, although showing some strength in the recent months, remains at 44 percent.
The legislation also allows for the Treasury Department to create a federal backstop program to ensure the financial well-being of Government Sponsored Enterprises (GSE), specifically, Fannie Mae and Freddie Mac, the nation’s two largest mortgage lenders.
“By providing the GSE with a solid regulator, and giving the Treasury the authority to step in and ensure the financial well being of the GSE, this new legislation should restore investor confidence in Fannie and Freddie, allowing them to continue to create programs that make the home-buying process an affordable and viable one for all,” Brown said.
It remains to be seen how much these measures will stem the bleeding and turn the tide on this financial and housing crisis, but they certainly are a welcome step in the right direction.