FHA loansThis is a guest post from Jeff Hammerberg, the founder of GayRealEstate.com, the largest company in the nation representing the rights of queer home buyers and sellers. These are his words’¦

Officials in Washington are busy crafting comprehensive rescue plans to help homeowners and revive a troubled housing market.

The Federal Housing Administration (FHA) has already stepped into a greater role as part of the government’s economic stimulus and real estate revitalization effort. The agency has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA-supported products. Refinancing business has tripled within the past two years at the FHA, as consumers seek more affordable loans with smaller down payments and lower interest rates.

Two significant events at the agency target homeowners seeking affordable loans and alternatives to costly adjustable rate mortgages. The most recent is a change in the amount of mortgage money that the FHA can insure.

Limits for FHA-insured loans were adjusted a month or two ago to compensate for extreme inflation in the housing market during the last bull market. As the housing bubble expanded, so did home values, so that the medium price of a home nationwide jumped considerably. In pricier regions like California, the average home now costs around half a million dollars. So the FHA was given permission to raise their cap from a rather outdated $362,790 to $729,750. The new loan limits help not only buyers but also homeowners wishing to refinance more expensive properties.

The other big initiative, supported by the Bush administration and announced at the end of 2007, is a project dubbed FHASecure. Under FHASecure, about a quarter of a million households will avoid foreclosure by refinancing with FHA-insured loans. FHASecure lets homeowners with strong credit histories refinance with attractive rates and terms, as long as they were making timely mortgage payments before their loans reset and triggered defaults.

One of the most ambitious and hotly debated plans is one now being argued in Congress that was conceived by Representative Barney Frank, the Chairman of the powerful Financial Services Committee. Under his proposed plan, the government would inject some $300 billion into the sagging housing and mortgage markets by expanding the jurisdiction of the FHA to insure mortgages and the refinance of existing mortgage loans.

To try to ease the impact on taxpayers, the Frank proposal also includes provisions for adding various fees and small closing costs to these loans, so that borrowers would help pay for the federal insurance. The most punitive fee would penalize those who use the loans to refinance homes but then sell them for a profit, and was added to the plan to discourage people from using the loans to “flip” houses for quick cash. If someone sells during the first year, for example, they will pay a penalty equal to all of the profit they derive from the sale. During the second year of the new mortgage they would have to pay 80 percent of their profits back to the FHA, and the fees would gradually diminish through the fifth year. After five years of servicing the loan, homeowners who sell will be charged a so-called “exit fee” of three percent of any profit they make.

While some see the exit fee as an imposition on consumers, most agree with it because it creates a method for the FHA – and taxpayers – to share in a real estate market rebound. By helping homeowners avoid foreclosure now, in other words, the FHA becomes entitled to a small stake in any equity that accumulates in the future.

  • Lenders would need to forgive significant amounts of debt owed to them for the plan to work, because many homeowners owe more on their mortgages than their properties are worth. But those who support the idea say that it will help both lenders and homeowners.
  • Overall, the proposal could prevent between one and two million foreclosures and halt home-price declines that are now fueled by excessive inventories of repossessed homes
  • Mortgage companies will lose more if they have to foreclose on homes than they would by letting borrowers off the hook for some of their outstanding debt when they refinance.
  • And the newly structured loan would have the backing of the FHA, which gives added incentive to lenders and investors to go along with the plan.

Critics say the bill does not provide adequate protection for taxpayers, because it calls for the FHA to lower its loan application standards and lend to people who are already in financial trouble with less than stellar credit.

Meanwhile Robert Shiller, a Yale economist, says the real culprit is inflation, not lenders, loans, and homeowners. Home prices adjusted for inflation grew 85 percent during the decade that ended in 2006. But despite the downturn they have only shrunk by 15 percent. That insight may not help to resolve the foreclosure rescue plan debate, but it certainly supports the notion that over the long haul, real estate is still the best investment – despite historic setbacks and bearish market cycles.

Whether you’re buying, selling, or refinancing, contact the professionals at www.GayMortgageLoans.com and www.GayRealEstate.com. Or call toll-free at 1-888-420-MOVE (6683). The entire network is comprised of experts dedicated to assisting the GLBT community.

More about Jeffery Hammerberg
Jeffery Hammerberg is Founder and President of Gay Real Estate, Inc. – the nation’s largest group of companies connecting gay & lesbian home buyers and sellers to gay, lesbian and gay friendly real estate agents. Since 1997, Hammerberg has created a virtual real estate marketplace for the LGBT community.