Here is an update to the market and the temporary stimulus package that was passed on Tuesday. Attached is a copy of the actual bill. Given some of the following is speculation, but it is the best information that we have currently available.
I. Temporary FHA & GSE Mortgage Increases
The House passed overwhelmingly the economic stimulus package on Tuesday afternoon. It included a temporary increase for both the GSE and FHA mortgage limits. FHA and the GSEs will also use virtually the same methodology (e.g. definition of area and area median sales price) as determined by the HUD Secretary which should reduce differences in the new limits. Attached is a copy of the legislation. The mortgage limit increases are Title II of the bill (page 15).
The stimulus bill now moves to the Senate for consideration. As you have probably heard, the FHA modernization bill was removed from the House stimulus package over the week-end. However, Senator Dodd, Chairman of the Senate Banking Committee, has indicated a willingness to include the FHA modernization bill in the Senate stimulus package. In addition, several Republicans including the ranking Member on the Committee (Richard Shelby) believe higher GSE limits should only occur in conjunction with comprehensive GSE reform (e.g. stronger regulation).
Quick Analysis:
Add it all up and we have an extremely volatile situation and there probably will be no definitive answers for at least a week or two.
However, the current market conditions that precipitated the stimulus plan remain problematic for the broader economy and the housing problems are likely to continue to deteriorate in the coming months. Accordingly, we believe when the “dust settles”, there will be higher GSE and FHA mortgage limits. Also FHA modernization will be enacted. Hopefully both will occur in February. However, it is going to be a “bumpy” ride.
Discussion
We will look at the impact of the mortgage limit increases separately in an effort to minimize confusion.
FHA
For loans underwritten (“credit approval”) by December 31, 2008, the legislation makes four changes:
· Raises the base loan limit (“floor”) to 65% of the current GSE limit ($417,000) = $271,050
· Raises the maximum FHA loan limit from $362,750 to $729,750 (175% of the GSE base limit – $417,000)
o Secretary has the discretion to raise the maximum loan limit by $100,000 in an area at the $729,750 limit for any size residence (including 2-4 family units).
· Increases the calculation factor from 95% to 125% of area median sales price for determining “high cost” areas
o Multiply area median sales price by 125% to determine FHA maximum loan amount
· Implements GSE ratios for calculating maximum loan amounts for two-, three- and four-family units in all of the above categories
The legislation does not appear to permit any type of FHA refinancing on loans originated above the loan limits in effect at the time of the refinancing including streamline refinances.
There are two major changes in the stimulus package since last week’s announcement. The FHA mortgage limit increase will not be permanent and also that the House version of the FHA bill is not part of the stimulus package. We will discuss the impact in the discussion of the status of the FHA modernization bill below.
What happens next?
The stimulus bill goes to the Senate for consideration. While there is tremendous pressure to move quickly on the legislation because of market conditions, there have already been proposals floated by several Senators that could delay passage of the bill. With respect to the mortgage limit issue, for example, some senators may want to lower the maximum loan amount to $625,000. Over the next week, we should have a better sense of how it will play out. The Senate will take up today.
To state the obvious, the situation is extremely fluid. The one thing that we have going for us is that it is in everyone’s political interest (both Republican and Democrat) to get something done relatively quickly. Accordingly, we expect the stimulus bill should be enacted in February barring some unforeseen “flare-up”. If the controversial issues are resolved quickly, the bill could be signed prior to the Presidents’day recess in mid-February. Of course, another round of “bad market news” could expedite this bill as well as the FHA bill.
Implementation Timing after President’s Signature
Based on past experience, we expect several elements of the FHA stimulus legislation to be implemented quickly possibly the day the President signs the bill.
1. The new “floor” (i.e. $271,050) should be effective on enactment (President signs bill).
2. Implementation of the new calculation formula (changing from 95% to 125% of area median sales price) can also occur as quickly.
Since FHA published the 2008 mortgage limits for high cost areas in Mortgage Letter 2008-2 on January 18th, it is a straight-forward calculation for areas that will be above the new FHA “floor” and below the current FHA maximum loan amount of $362,750. Below was the listed example:
· The calculation works as follows: Take the current 1-family mortgage amount for an area and divide it by .95 and then multiply that amount by 125% Below is the calculation process for the Cincinnati MSA.
Current limit for Cincinnati area: $256,500
Area median sales price: $256,500 divided by .95 = $270,000
Proposed limit: $270,000 multiplied by 125% = $337,500
3. For areas with median sales prices above $381,842 (current minimum median sales price to support the $362,750 limit), we presume FHA has already completed that analysis as part of the 2008 mortgage amount update mentioned above.
What does this mean for the FHA modernization legislation?
As was mentioned above, the House version of the FHA bill was “pulled” from the stimulus package. This point, coupled with the fact that the mortgage limit increase is temporary, means that we are effectively where we were after the Senate passed the FHA bill prior to the Holiday recess. We are waiting for a conference of the Senate and House Banking leadership to resolve the contested items.
The contested items remain the same. They are:
Mortgage limits for high cost areas
Mortgage broker eligibility
Seller funded downpayment assistance programs
Risk-based pricing
40 year term mortgages (which we assumed would be dropped but it appears that the House is interested in this provision)
Downpayment amount
Another wild card is the status of the housing trust fund since Barney Frank removed the provision when the FHA bill was included in the stimulus package. With FHA bill removed from the stimulus package, Chairman Frank has indicated that he wants the trust fund included in the Conference discussion. He also mentioned agreement could have been reached quickly if the FHA bill had been included in the stimulus package.
We do have some “good news”. We understand that staff of the two Committees are discussing the contested items. However, it is really too volatile to handicap the elements of the final bill.
Bottom line: With the focus on the stimulus package, FHA may slip until the second or third week of February before the issues are finally resolved and the bill goes to the President for signature. It is encouraging that the President specifically mentioned the FHA legislation in his state of the Union address on Monday night.
GSE limits
The legislation appears to implement the FHA methodology for the GSEs. There are four differences.
· This provision applies to loans originated beginning on July 1, 2007.
· The GSEs will have a higher “floor” ($417,000).
· There is no discretionary authority for high cost areas (i.e. additional $100,000 increase).
· The GSEs may refinance loans that were originated under the mortgage limit provision.
Another difference is that the GSEs have a regulator (OFHEO). For that reason, as well as the fact that this is a totally new concept for the GSEs, we are not as sure how the provision will be implemented.
That being said, the statute appears to require the GSEs to use the same areas and median sales prices that are used to determined the FHA limits. It would eliminate the problem of different GSE and FHA limits in the same areas (at least those w/ mortgage limits above $417,000).
It would also appear to mean that you will be able to determine the GSE limit in areas that you can determine the area median sales price from the FHA data (i.e. areas w/ median sales prices above $333,600 and below $362,750). For areas at the current FHA maximum loan limit, the maximum limit is seemingly guaranteed to increase to $477,300 at a minimum ($362,750 x 125%) Of course some areas will increase much more.
What it means for GSE loan limits
For at least until December 31, 2008, the GSEs will have different local mortgage limits like FHA currently does. There will not be as many as different areas because of the higher “floor” ($417,000). We assume there will also be system issues associated with the implementation of the FHA-type formula for the GSE originations.
We believe that the GSE and FHA limit increases are tied together in the bill so our expectations about the timing of their enactment are identical. The wildcard is the implementation process. Hopefully possible delays in the GSE implementation will have no impact on FHA.
Conclusion
As we already know, there have already been several unexpected turns along the road to the FHA legislation and we expect more. Despite the ongoing frustration with finalizing the bill, it is as close to certain as anything can be in Washington that an FHA modernization bill will be passed. The key question is when. Hopefully we will find out in the next month if not sooner.
