Mortgage Blog

A last-minute deal has been reached to allow for Senate passage of legislation to reform the Federal Housing Administration (FHA). The bill had been blocked due to opposition from two Republican Senators, who have now agreed to let the bill move forward. This is a positive move for the mortgage market generally as the legislation would allow for broader availability of government-insured loans through FHA. Estimates vary, but the bill could allow the refinancing of another 200,000 subprime ARMs in addition to the increased refinancings FHA already expects to do under current law. While the Senate must still resolve differences with the House over competing versions of FHA reform legislation, this is likely to occur early next year.

1. The bill would increase the availability of FHA loans. The Senate bill would raise the loan limit from roughly $363k to $417k and would lower the required down payment to 1.5% from 3%. However, it would block a shift to risk-based pricing of the insurance premiums that borrowers pay (FHA currently charges a fixed rate) and which the Bush Administration hopes to implement for 2008.

2. FHA is a key part of the recent subprime agreement. Estimates vary, but roughly one-third of subprime ARMs resetting over the next two years may have adequate equity and credit scores to refinance. In crafting the recent subprime reset freeze proposal, it was assumed that many of these loans would be refinanced through the FHA. The Administration estimates that roughly 200,000 more could be refinanced under this legislation than under current law. Those borrowers with no or negative equity would not be eligible for an FHA loan even under this proposal, however.

3. Enactment of FHA reform has become more likely, but won't happen today. The Senate bill, which now looks likely pass today, differs from the House-passed bill in several respects, and some time will be required to work out the differences. The main differences deal with required down payment (House: 0%, Senate 1.5%); loan limit (House: up to $730k, Senate: up to $417k) and risk based pricing (House: would allow it, Senate: may block existing FHA plans to implement it for one year). Given that there is tremendous political pressure on lawmakers to address the mortgage mess, it is at least possible that a deal could be reached quickly, perhaps in a matter of days. That said, Congress is likely to adjourn for the year next week, so final enactment seems more likely in 2008.

4. This proposal may benefit the GSEs eventually, but not today. If the Senate passes the legislation later today, as now looks likely, proponents of liberalizing rules for Fannie Mae and Freddie Mac may try to place other legislative changes on the bill. This doesn’t look likely to happen today, however. The two reforms that would be most likely to be attached to an FHA reform bill would be an increase in the conforming loan limit from $417k up to $625k, and an increase in the portfolio cap of up to 10%. Both have been debated over the last several months but have not come up for a vote. It is possible that the GSEs and their supporters on Capitol Hill might be successful in eventually linking provisions dealing with loan limits and the portfolio cap to the FHA legislation, but we don't expect it to happen today, and believe that if such provisions were attached in the Senate it would sink the deal that has been struck to move the bill forward. That said, as House and Senate negotiators work out a final bill to send to the President, some GSE-related provisions might 'slip in' to the final version. Regardless, enactment of FHA reform should ease some stress on the mortgage market generally.

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Today's FOMC meeting has adjourned with an announcement of another quarter point rate cut by Mr. Bernanke and friends. This was the most popular move with analysts and market participants, but as expected, the markets have reacted strongly. Stocks have dropped considerably while bonds have rallied since the announcement. The Dow currently stands down 177 points from yesterday's closing level while the Nasdaq has fallen 35 points. The bond market is now up 42/32, which will likely improve this afternoon's mortgage rates by approximately .25 of a discount point over this morning's rates.

This was the third consecutive meeting with a rate cut, which will mean immediately lowered credit card and home equity loan rates for consumers and cheaper borrowing costs for corporate borrowers. In the post-meeting statement, the Fed indicated that more rates cuts may be needed to prevent the economy from slipping into a recession, but also hinted that inflation still a concern. Still, bonds are rallying hard while stocks are falling. I think this afternoon's bond strength is partly being fueled by the stock weakness than directly by the Fed's rate cut or statement.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent.

Proposal does not require legislative action by Congress.  It is voluntary and is available immediately to those lenders that choose to participate.  About 75% of servicers are reported to support the plan.  Such as Countrywide, Wells, Citi, Chase.  But independent mortgage servicing firms could opt out.

Only affects subprime owner occupied adjustable rate mortgages originated between January 1, 2005 and July 31, 2007.  Option and Hybrid ARMS we are still unsure if they are affected.  Fixed rates definitely not included.  No one has really defined what a subprime loan is, but suggestions have been made to extend to Alt A.

Only applies to loans that have been securitized.   If the lender has it in portfolio, it does not apply.  Unless they opt to do something on their own for the borrower.  Borrower must have a current loan for the mortgage.

Borrower must have a FICO lower than 660.   Supposedly a complex formula comparing a current credit history score with a score at origination will determine the eligibility of the borrower.  I guess a black box will determine this.