Pressure grows to stimulate housing alongside foreclosure relief

McClatchy NewspapersMay 18, 2009 

WASHINGTON — President Barack Obama has rolled out several initiatives since mid-February to stem the rising tide of foreclosures by slowing the supply of homes coming onto a down market. Now there's a growing clamor for him to do more to spark moribund home sales.

Real estate agents, mortgage brokers and lenders all want a government refinance program expanded so that more homeowners whose properties have lost value — especially in hard-hit states such as Florida and California — can take advantage of today's low mortgage rates.

Among other things, they'd like to see the new $8,000 tax credit for first-time homebuyers expanded to include all home purchases.

"Not only expand it to all buyers, but actually increasing the amount," said Steve O'Connor, the senior vice president of government affairs for the Mortgage Bankers Association.

The lenders' group applauded Department of Housing and Urban Development plans to create bridge loans that would allow first-time homebuyers to use the tax credit at the time of closing.

The credit was designed to benefit homebuyers after filing their annual tax returns. It applies only to Federal Housing Administration loans underwritten by FHA-approved lenders.

"We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit," HUD Secretary Shaun Donovan told real estate agents last week.

Beyond FHA loans, some housing experts would like to allow the mortgage-finance giants Fannie Mae and Freddie Mac to use the $8,000 credit to reach more homebuyers. The government seized Fannie and Freddie last September, and some experts say that they can be used to stimulate demand for housing.

"We see no reason that Fannie and Freddie can't take the approach that HUD Secretary Donovan announced . . . to allow the borrower to use it as a down payment toward closing costs," O'Connor said. "We would encourage Fannie and Freddie to look at that."

An Obama administration official, speaking on the condition of anonymity because he wasn't authorized to discuss details, said the FHA program needed to demonstrate that it could work before it could be expanded.

"Because we back the mortgage, we can set the underwriting criteria," said the official, noting that would be harder to do with Fannie and Freddie since they don't back loans but purchase them in a secondary market.

Many taxpayers bristle at the idea of having their tax dollars supporting someone else's home purchase, and since first-time homebuyers also tend to be weaker borrowers, some experts fear that the tax credit could encourage a repeat of today's woes.

"It's almost tantamount to 100 percent financing. The industry has already had its issues with 100 percent financing," said Matt Zaborksy, who owns the mortgage brokerage firm Norbeck Olney Rockville Mortgage Co. in Maryland. "Are we opening up a can of worms? People buying houses with no skin in the game . . . were a major factor in what has happened nationwide."

When Congress passed it, the credit was set at 10 percent of a home's value, up to $8,000. The credit is available in full to individual tax filers with adjusted gross incomes below $75,000, and joint filers with incomes below $150,000. It's phased out completely at $95,000 for single filers and $170,000 for joint filers.

The National Association of Realtors doesn't like these limits. Association chief economist Lawrence Yun said that policymakers should expand the credit to all home purchases, and focus more on making refinancing available to borrowers whose homes had lost significant value but who remained current on their payments.

"They should expand that more, because if the homeowner is current on their payments at a 7 percent interest rate, surely they will be current on (mortgage rates) under 5 percent," Yun said.

The Obama administration last week updated the Making Home Affordable program it rolled out Feb. 18. One key component involves allowing Fannie Mae and Freddie Mac to refinance mortgages that have loan-to-value ratios as high as 105 percent.

That means a homeowner can owe up to 5 percent more than his or her home is worth — a condition called being "underwater" on a mortgage — and still qualify for refinancing. Fannie and Freddie used to allow refinancing only up to 80 percent of a home's value. This component of Making Home Affordable seeks to reach as many as 5 million at-risk borrowers.

Three months into the program, however, only 51,000 of the 233,000 applicants declared eligible met the definition of at-risk, owing more than 80 percent of their homes' present values. The rest — more than three-quarters of the applicants — owed less than 80 percent and thus weren't at-risk homeowners, although refinancing them into lower mortgage rates still would help the economy.

To reach more at-risk borrowers, many experts think that the program must allow people who're as much as 15 or 20 percent "underwater" on their mortgages to refinance.

"I think there should be more focus on trying to lessen the burden on homeowners who may question why they are stuck with high interest rates," Yun said.

Another administration official involved in the effort, commenting on the condition of anonymity in order to speak freely, said that while technically feasible, raising the loan-to-value rates wasn't likely.

"Changes in our program are always possible, but right now there are no plans to take such steps," the official said.

Many "underwater" mortgages are jumbo or nonconforming loans. They're above the $417,000 cap that historically has limited which loans could be sold to Fannie and Freddie. That cap now stands temporarily at a maximum of $729,750, but the recession has put many homes above that value on the market too. It's why real estate agents want Congress to lift Fannie and Freddie's loan-purchase cap altogether.

"Just get rid of the loan limit until the housing market stabilizes, then worry about Fannie and Freddie in the future," Yun said, referring to the debate over how and when Fannie and Freddie should emerge from government control. "Job losses have been across the board, and it's only fair that trying to stimulate the housing market should be for all buyers."

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