New Act Aimed at the Housing Market Bubble

H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008, soon to be passed and is supposed to help the US housing market survive the current cycle. One piece of this legislation that I am greatly concerned with is the FHA Modernization provision. More specifically, how it creates a larger barrier to home ownership and real estate investing for borrowers by increasing the required down payment from 3% to 3.5%, raising the interest rates for acceptable borrowers with less than perfect credit thru risked-based add-ons, and ELIMINATING seller-funded, down payment assistance programs. 

Many of you don’t know that FHA just increased their upfront funding fee from 1.5% to 2.15% for these same borrowers on July 15th this year as well as increased the monthly mortgage premiums from a rate of .5% TO .55%. I believe that this is a much too delayed, knee-jerk reaction to a problem facing our nation’s overall credit crisis. HUD could have considered less drastic tweaks to the program and measure those successes. After all, the loans that are not performing have already been made. These changes are not going to save them from those loans made in the past and by raising the requirements, we will have fewer families who can absorb the enormous inventories of homes on the market. HUD’s own mission statement is being compromised by this legislation.

Home buyer education should be another step in the process that could deter future defaults. If consumers receive home buyer counseling prior to buying, they will understand more of what to expect and not get in over their heads.  HUD also never mentioned about lowering their maximum allowable total debt ratio so that consumer’s can still buy, just maybe not quite as much home. The good news is, since home prices have dropped, they could probably still buy the same home they would have before the ratio requirement was amended. 

Of course this market has both positives and negatives for real estate investors, property is currently available for a bargain price but selling is more difficult. This opens a lot of options for the rental income model as more people are forced to rent. The lesson is there are always opportunities for those who are creative.