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Monday, July 6, 2009

Congress Cap and Trades Homeownership

A major component of the American Dream is homeownership. Having worked for more than two decades helping families purchase their homes I know first hand how important homeownership is to many Americans. There is a strong emotional commitment to owning our own piece of dirt, our own walls and the roof that protects our children from the elements. Two amendments in our Bill of Rights protect our homes from the government. The third amendment protects us from troops quartering in our homes without our consent. The fourth amendment protects us from unreasonable searches of our homes.

The current Congress has aided President Obama in passing bills and legislation to protect homeownership, or encourage more Americans to purchase homes. Of all the legislation passed the greatest impact, by far, has been the raising of the loan limits for Fannie Mae, Freddie Mac and FHA mortgages; in particular the lifting of the FHA limits. While hindering the closing of purchase transactions with the Home Value Code of Conduct--which hopefully will be repealed or suspended soon--Congress perhaps unwittingly by passing the loan limit increases opened up real estate markets across the country to first time buyers who were waiting to enter and become homeowners.

Most first time buyers are working with a limited amount of funds for down payment and closing costs, this has been true historically which is why when President Franklin Roosevelt created the Federal Housing Administration to assist with mortgages to Americans, the program was created with long term mortgages and low down payments. FHA mortgages could be obtained wtih borrowers putting down 3% of the purchase price until about a year ago, now FHA borrowers must put at least 3.5% of the purchase price into the transaction as down payment. Every FHA borrower pays into a mortgage insurance pool to protect lenders' losses should there be foreclosure--a insurance pool that has worked well through the current crisis.

Until Fannie Mae and Freddie Mac loosened their lending guidelines and began allowing 100% financing, with very high debt to income ratios (and minimal income verification), FHA was the primary loan for most first time buyers. The guidelines allowed family members to co-sign for the borrowers, allowed parents to assist with funds to close and was a bit more lenient on credit analysis. The purpose of the program was and is to promote responsible homeownership, and it has worked. FHA loans became very scarce in California and many other parts of the country once the 21st Century began for two main reasons: 1) As mentioned the increase in loan products available through Fannie and Freddie that allowed 100% financing, combined with 2nd trust deeds borrowers could purchase a home with no down payment and no mortgage insurance 2) FHA loan limits were well below the market medians and could not keep pace with the booming home prices.

In 2007 Congress passed a temporary increase in loan limits for FHA, Fannie Mae and Freddie Mac. FHA limits were raised to match the conforming limits and a new "high-balance" limit was created for facilitating higher transaction prices. As mortgage insurance companies pull out of California and other states, and/or severely restrict their criteria for issuing insurance on mortgages with less than 20% down payment, the FHA mortgage product has become critical to keeping our housing markets on life support, and in many areas begin a reversal of the downturn.

Since last fall the housing industry has seen a huge influx of first time buyers. With low prices and low rates, many families are finding they are able to obtain homeownership--the old fashioned way using FHA financing. Fully qualifying applicants' income, credit, and assets, FHA underwriters are approving thousands of mortgages for new homeowners. Across the state and across the country we see data where these homebuyers are stabilizing prices, or at least slowing the decline. In the past year our industry has seen the highest number of FHA mortgages funded in perhaps decades. Congress, by lifting the loan limits, contributed to this positive economic trend; if Congress went home after passing the loan limit increases they would have done all they needed to do to let the markets begin to revive.

But Congress being Congress and Obama being Obama there was more on their agenda. At the end of June by a slim margin, the bill passed due to the support of eight Republicans, the House of Representatives passed H.R. 2454, the Waxman-Markey bill, also known as Cap and Trade. I will not go into the details of the entire bill and how damaging it is to the United States economy, increases our dependence on foreign oil and the many other fallacies of the bill. What I want to highlight is one aspect of the bill that is discriminatory to many first time buyers, those who need to use FHA financing to purchase a home.

Included in the bill is an amendment that will require all home transfers that are using an FHA mortgage to have a federal "energy audit" performed on the home. An inspector will go through the property and check insulation, water flow, heaters, air conditioners, all appliances, to see if they meet new federal standards for lowering the energy efficiency of American homes. The seller will have to pay for the audit and pay for any necessary corrections before the mortgage can be approved and the transaction closed.

Imagine an elderly couple who purchased their home in 1973, have upgraded their appliances in the early 1990s and now are selling their home to move into Leisure World or somewhere else. Several local real estate professionals have told them their home value is approximately $425,000 and they should expect offers between that number and $400,000. Imagine two families wish to purchase the property: one is offering $405,000 and will be putting 20% down and getting conventional financing; the other is offering $425,000 but will be using FHA financing. Sounds easy, take the offer with $20,000 more to the seller. But wait! We must first spend several hundred dollars for an energy audit, then we must comply with the findings: install insulation, redo the windows, replumb the home, replace the appliances, and trade out the toilets.

Twenty plus years experience in the housing industry tells me that if the energy audit for home transfers is left in the Cap and Trade bill as it goes through the Senate it will put an end to most FHA financed transactions, will lead to lower home prices due to less demand and severely slow down the real estate revival that is slowly occuring around the country. "But just sell the house for more money to compensate the seller for the repairs," some will say. Sure raise the price just for FHA buyers, then tell me how it will get an appraisal at that value--especially with the Congress imposed HVCC appraisal process that has been killing sales across the country.

Cap and Trade is a bad bill, the energy audit clause makes a bad bill horrible. Sunday "Anonymous" in providing answers to several of my "Just Questions" indicated a no comment on my question as to whether members of the House knew they were voting to discriminate against first time homebuyers with the Cap and Trade vote. I hope this provides the information s/he, and you, need to see how poorly this legislation was put together and yet another example of our Congressional Representantives not reading legislation but just casting votes.

UPDATE: I believe this is my first past-posted update. The Washington Times has an excellent editorial on Congress passing unread legislation. The 300 page amendment mentioned in the editorial contained the "energy audit" language I address in this post. The Times is calling on all members of Congress to sign a pledge not to vote on a bill, particularly any health care bill, until the have personally read the bill and it has been posted for at least 72 hours to give the public time to read it. Sounds too reasonable for Congress, I wonder who will sign? As I write this at 10:00 a.m. Pacific only two Senators and two Representatives have signed. Follow it here:

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