CBTGHomes’ view on the proposed FHA requirements

I was perusing the latest real estate industry news over at CNN Money today and came across an alarming topic that needs to be addressed by the real estate industry and by the general public as soon as possible, before any damage is done.

Though the above link is to a CNN Money blog, I also found this article on Philly.com, illustrating more of the facts and aspects to this new proposal, which aims to reign in the amount of loans granted by the FHA.

Essentially the FHA is getting a bad rap for the quantity of loans it is issuing, as the number of FHA loans as a percentage of all home loans has risen dramatically since the housing crisis began, from a mere 3 percent of all loans in 2006 to a stunning 30 percent of all loans in 2009.  And the most important number here?  75 percent of FHA loans are to first-time homebuyers – those up-and-coming individuals and couples who are currently among the only buyers gobbling up short sales, foreclosures and bank owned/REO properties, which in turn keeps inventory in check and helps maintain home values for everyone else who is either thinking about selling or simply hoping their home’s don’t depreciate any further than they already have.

Supporters of this legislation feel that the FHA is being too risky in loaning so much money to first-time homebuyers, who are only required to make a very low 3.5 percent downpayment in order to secure the loan.  They say the homeowners need to have “more skin in the game” before they should be awarded these loans, because individuals purchasing homes beyond what they can afford is what got us into this mess in the first place.

However, this is a seriously flawed argument.  The housing market’s ailments come from only a few main problems – home buyers getting into adjustable-rate mortgages (ARMs) without reading the fine print and banks making loans without analyzing buyers’ incomes closely enough.  For example, going by stated income instead of actual income, allowing unrealistic ratios, etc.  The issue is not whether you can put down $2,000 or $200,000 as a downpayment, the issue is whether or not you can pay off the loan within its terms.  After all, an individual or couple with low debt, a decent education, a good credit score and a proven work history, regardless of how much money they have in the bank, is always a safer bet for a fixed-rate loan than a person with a lot of liquid assets but an unreliable work history and a habit for taking big financial risks. With the right ratios and a modest home, the reliable, hard-working individual or couple will rarely fail to make their modest payments, where a high-risk/high-reward candidate may make a financial mistake that will cost them six months of mortgage payments and thus cost them the house.

On top of everything is the issue of the tax credit extension and expansion for first-time homebuyers. When these individuals are buying up the bulk of FHA mortgages (and accounting for roughly half of all home purchases in the country), why would we think it wise to push them out of the game by requiring more money from them at the closing table?  If a hard-working home buyer wants to get into the game and send 25-30 percent of their hard-earned monthly income to a bank so they can own a home, how is this a bad thing?  From what I know about the housing collapse, the amount of equity one had in a home had very little to do with whether they kept the home or not. it ultimately came down to ballooning rates and falling income, resulting in the complete inability to make the monthly mortgage payments that at the end of the day, are the only thing that really matter.

Passing any restrictions on FHA loans before the tax credit expires June 30 would be hugely counterproductive and would essentially resemble the federal government shooting itself, and the housing market, in the foot.

My one exception here is the raising of the minimum credit score for loan qualification.  Credit scores reflect a person’s ability to make payments on time, at any expense, and should be the most important aspect when considering an applicant for an FHA loan.  But if the individual(s) show a solid history of income and a good credit score, what is the value in forcing them to waste thousands of dollars on rent over several years just so they can save up a larger chunk of cash to put down on a home?  It is my opinion that the value of years of mortgage payments will do more for the banks, the housing market and the economy as a whole than that extra downpayment cash could ever do.

So I say leave the FHA requirements alone, for now.  If any tampering needs to be done, the government should at least wait until the tax credit deadline passes, but in the event that the deadline passes and we see a precipitous drop in loan applications thereafter, further tightening the requirements will only exacerbate the problem.  I just can’t see a situation where this legislation is needed in today’s very fragile real estate industry.

Everything you need to know about the first-time homebuyer tax credit extension and expansion

Tax Credit for First-Time Homebuyers

1. The extension moves the original deadline of November 30, 2009 forward to June 30, 2010. However a sales contract must be signed by April 30, 2010, and that property must be closed on by or on June 30.

2. The $8,000 tax credit for first-time homebuyers is unchanged other than the deadline. The tax credit allows up to $8,000 in the form of a tax rebate when the buyers file their 2009 taxes this coming spring. I say up to $8,000 because the tax credit is actually for the lesser of two amounts – 10 percent of the home purchase price or $8,000. This means if the property is purchased for less than $80,000, the tax credit will not be for the full $8,000.

Tax Credit for Current Homeowners (NEW!)

1. The homeowner must have lived in the same primary residence for at least five of the past eight years (five years must be consecutive).

2. Current homeowners who close on a new primary residence will receive a $6,500 tax credit if they sign a sales contract by April 30, 2010 and close by June 30, 2010 (same deadlines) on a new primary residence.

3. The new primary residence does not have to be more expensive than the current home to qualify.

4. All common purchases qualify – new construction, existing homes, condos, townhomes, etc.

5. The $6,500 tax credit is not retroactive and only includes homes purchased between November 6, 2009 and June 30, 2010.

Other General Information

1. Income limits have been raised for both new and current homeowners. Individuals can now make up to $125,000/year to qualify, and couples can make up to $225,000 to qualify.

2. The home cannot be more than $800,000 to qualify for the tax credit.

3. Individuals/couples who take advantage of either the $8,000 or $6,500 tax credit must live in the new primary residence for at least three years before moving or selling again. If the primary residence is sold within three years, the tax credit is recaptured entirely by the IRS.