Tuesday, February 15, 2011

For Buyers on the Fence

Breaking Real Estate News

Dramatic Changes For Fannie and Freddie | Required Down Payments Increasing

Bank of America reacts to the looming changes for Fannie and Freddie.

First the ‘bad news’: Everything about obtaining a mortgage loan is about to change. Vastly fewer people will have the financial ability to obtain a loan.

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Its a simply fact that we are moving away from a homeownership society. These drastic changes will result in fewer people being able to buy…and of course, fewer home sales. Prices will have to fall…more people will become underwater. More Short Sales…and REOs. (If anyone can argue the case for this downward cycle not continuing please feel free to speak up)

Longer term the private sector will create mortgage products to fill the gap. When will this happen?, not soon. The banks will no longer have to compete with the government (Fannie and Freddie) for mortgages. Hypothetically, competition between the various major banks for mortgage loans will produce more mortgage products…or so the argument goes.

The new normal means significant money down. Be clear, just because Fannie and Freddie will ‘allow’ down payments of 10% doesn’t mean the actual lenders will loan with just 10% down. For the most part, 15-20% will be the new normal for down payments. That’s for all loans. Jumbo mortgages are where the real problems will be.

Fannie and Freddie is lowering the maximum loan limit in the most expensive areas of the country from $729,750 to $625,500. For reference sake, only a few years ago the maximum loan amount was less than $450,000 in most of the US. So, this is a slow…painful, return to normal. The required down payments for Jumbo will be 30%…at least.

For ALL mortgages products the actual cost of obtaining the loan is going to increase substantially. Expect most buyers will need to have as much as 3% just in loan costs… (Not including down payments).

Will this have a negative effect on home prices? You bet.

Now the ‘good news‘. I will fully admit..this is a stretch of the definition of good news. These looming changes could result in a surge in real estate activity. How? Motivate your buyers. Share this info with all your on the fence buyers…they need to know that they need to buy and buy soon or they may simply not qualify to be homeowners. Motivate your home sellers. Home sellers (especially owners of homes over the qualifying loan limits) must price their homes to sell ASAP. In this market, with these looming changes..it DOES NOT pay to wait.

Here is BoAs reaction

The White House outlined last Friday its plans to begin shrinking their support of both of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac. While the process could take several years, the effects will be felt in coming months.

The government took over both GSEs in September of 2008 when the financial crisis took place. Both agencies have been in receivership which has cost tax payers an estimated $134 billion so far. If the housing market was not so fragile the timeframes would be much quicker to dissolve the two agencies.

Last year, Fannie, Freddie and FHA guaranteed 95% of all home loans. The role these government agencies have played has been crucial to the lender markets over the last 40 years. There would not have been a housing market the last two years had these agencies been dissolved as is the plan going forward. The goal is to have the private sector originate mortgages and securitize them without any government backing.

The proposed plan by the administration is to allow the maximum loan limits to fall to $625,500 from $729,750 beginning October 1st, 2011. The plan is to increase minimum down payments to 10% on all loans eligible for purchase by Fannie and Freddie. In addition, insurance premiums charged on new loans backed by the Federal Housing Administration (FHA) will also go up.

Information provided by Kevin Budde, Bank of America

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