Archives for August 2013

REPORT: Home Prices At 5 Year High

Home prices rose in June to their highest levels in nearly five years, increasing 2.2 percent, according to the Case-Shiller Home Price Indices released Tuesday. The 20-city index was up 12.1 percent from a year earlier, and the companion 10-city index was up 11.9 percent.

Economists surveyed by Bloomberg had expected the 20-city index to increase 2.3 percent from May and 12.2 percent from a year ago.

Case-Shiller’s national index, reported quarterly by Standard & Poor’s, was up 7.1 percent in the second quarter to 146.32, its highest level since third quarter 2008.

All 20 cities included in the survey improved both month-to-month and year-to-year.

Hear_This-320The two surveys have improved monthly and yearly for 13 consecutive months.

The national index has improved in four of the last five quarters, dropping only in the fourth quarter of 2012 in that stretch. The 7.1 percent quarter-over-quarter matched the increase in the second quarter of 2012 as the largest quarterly improvement since the national index began in 1987.

The national index was up 10.1 percent year-over-year, matching the gain in the first quarter as the largest annual jump since the first quarter of 2006.

The 10-city index rose to 173.37, up 3.73 from May, to the highest it has been since August 2008 when it was 173.35. The 20-city index rose 3.41 to 159.54, its highest since September 2008 when it was 161.64

In the same month, according to the National Association of Realtors, the median price of an existing single-family home rose 5.4 percent, up 13.3 percent from a year earlier.

According to the NAR, homes prices were held back by sales of distressed homes. Foreclosures, eight percent of transactions, the NAR said, sold for an average discount of 16 percent below market value in June, while short sales, seven percent of transactions, were discounted 13 percent.

Home values improved as well despite higher mortgage rates, which could have both a positive and negative impact: rising rates themselves might bring prices down as buyers look for affordable monthly payments, but also increase demand as buyers try to lock in rates before further increases. The increased demand against weak inventories would send prices up.

While good news for home sellers, the continued sharp increases—the indices have shown double-digit year-year increases for four months in a row —are likely to revive concerns of a growing housing bubble as personal income growth continues to stagnate.

Still the increase in home values, according to economic theory, should mean improved consumer spending. The “wealth effect” theory holds that consumers spend based on increase in net worth, not income. Home values accounted for about 25 percent of the increase in net worth in the first quarter, according to the latest data from the Federal Reserve.

The Case-Shiller Indices have gone up for seven straight months and 13 times in the last 15; each index dipped last October and November.

The monthly increases were led by Atlanta, where prices rose 3.4 percent from May to June. The price index for Atlanta is at its highest level since July 2010. The price index rose 3.3 in June in Chicago, bringing prices there to their highest level since October 2010. Prices rose 2.8 percent each in San Diego and Las Vegas, while prices were up 2.7 percent in San Francisco.

Prices have increase for 16 straight months in San Francisco to the highest level since February 2008. Prices in Las Vegas have increased for 15 straight months and are at their highest level since February 2009.

Prices were up 1.8 percent in Phoenix, the 21st straight month-over-month gain, and 2.3 percent in Los Angeles, the 16th consecutive monthly improvement.

Year-over-year the price gains were led by Las Vegas, where prices were up 24.9 percent since June 2012 and San Francisco, where prices rose 24.5 percent in the last 12 months. Those year-over-year price increases were followed by Los Angeles, up 19.9 percent, Phoenix, up 19.8 percent, and Atlanta, up 19.0 percent.

Despite the June improvement, the 10-city index is down 234 percent from its June 2006 high of 226.29, and the 20-city index is off 22.7 percent from its July 2006 peak of 206.52.

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FHA Waives 3-year Foreclosure Waiting Period

Effective for FHA Case Numbers assigned on, or after, August 15, 2013, borrowers with a recent history of bankruptcy, foreclosure, judgment, short sale, loan modification or deed-in-lieu can apply — and get FHA-approved — for an FHA-insured mortgage.

The FHA has waived its 3-year foreclosure waiting period. If you’ve experienced any of the following financial difficulties, you may be program-eligible :

  • Pre-foreclosure sales
  • Short sales
  • Deed-in-lieu
  • Foreclosure
  • Chapter 7 bankruptcy
  • Chapter 13 bankruptcy
  • Loan modification
  • Forbearance agreements

The FHA realizes that, sometimes, credit events may be beyond your control, and that credit histories don’t always reflect a person’s true ability or willingness to pay on a mortgage.

FHA mortgage insurance is available for any loan which meets the following two conditions :

  • The loan must be made by an approved FHA lender
  • The loan must meet the minimum standards of the “FHA Mortgage Guidelines”.

The minimum standards of the FHA mortgage guidelines are straight-forward.

Some of the more well-known rules require mortgage applicants to show a minimum credit score of 500; to make a downpayment of at least 3.5% on a purchase; and, to verify income via W-2 or federal tax returns.

The guidelines also include such arcane topics as U.S. citizenship requirements for borrowers; relocation rules for trailing homes and income; and, minimum standards for condominiums and co-ops.

Loans failing to meet FHA mortgage guidelines do not get insured and the Federal Housing Administration has been steadily tightening its requirements since last decade’s housing downturn.

On August 15, 2013, though, the Federal Housing Administration moved to relax its guidelines for borrowers who “experienced periods of financial difficulty due to extenuating circumstances”.

Dubbed the “Back To Work – Extenuating Circumstances Program”, the FHA removed the familiar waiting periods that typically followed a derogatory credit event.

Use the Q&A below to learn more about the FHA’s Back to Work – Extenuating Circumstances program. 

What is the FHA Back To Work – Extenuating Circumstances program?

The FHA Back To Work – Extenuating Circumstances program is the FHA’s “second chance” for mortgage applicants who have experienced financial hardship as a result of unemployment or severe reduction in income.

Can I use the Back to Work as a first-time home buyer?

Yes, you can use the program as a first-time buyer.

Can I use the Back To Work program as a repeat home buyer?

Yes, you can use the program as a repeat home buyer.

Can I use the Back To Work program for an FHA 203k construction loan?

Yes, you can use the program for an FHA 203k construction loan.

Does the FHA Back To Work program waive the traditional 3-year waiting period after a foreclosure, short sale, or deed-in-lieu?

Yes, the program waives the agency’s three-year waiting period. You no longer need to wait three years to apply for an FHA loan after experiencing a foreclosure, short sale or deed-in-lieu.

Does the Back To Work program waive the traditional 2-year waiting period after bankruptcy?

Yes, the program waives the agency’s two-year waiting period. You no longer need to wait two years to apply for an FHA loan after experiencing a Chapter 7 or Chapter 13 bankruptcy.

Which types of “events” are covered by the FHA Back To Work – Extenuating Circumstances program?

The program can be used by anyone who’s experienced a pre-foreclosure sale, short sale, deed-in-lieu, foreclosure, Chapter 7 bankruptcy, Chapter 13 bankruptcy, loan modification; or who has entered into a forbearance agreement.

How do I apply for the program?

You can apply for an FHA Back to Work – Extenuating Circumstances mortgage with any FHA-approved lender. The mortgage approval process is the same for any other FHA-insured mortgage.

What are mortgage rates for the FHA Back To Work program?

Mortgage rates are the same as mortgage rates for any other FHA loan. There is no premium on your interest rate, nor are there additional fees to pay at closing. Your mortgage rate will be unaffected by the FHA Back To Work program.

My current lender says that it’s not participating in the program? What do I do?

If your current lender is not participating in the FHA Back To Work program, you can find another lender that does.

What are the minimum eligibility requirements of the FHA Back To Work program?

In order to qualify, you must meet several minimum eligibility standards. The first is that you must have experienced an “economic event” (e.g.; pre-foreclosure sale, short sale, deed-in-lieu, foreclosure, Chapter 7 bankruptcy, Chapter 13 bankruptcy, loan modification, forbearance agreement). The second is that you must demonstrate a full recovery from the event. And, third, you must agree to complete housing counseling prior to closing. You must also show that your household income declined by 20% or more for a period of at least 6 months, which coincided with the above “economic event”.

How do I document a 20% loss of household income for the FHA?

In order to document a 20% loss of household income, you must present federal tax returns or W-2s, or a written Verification of Employment evidencing prior income. For loss of income based on seasonal or part-time employment, two years of seasonal or part-time employment in the same field must be verified and documented as well. Income after the onset of the economic event, which should represent a loss of at least 20% for at least six months, should be verified according to standard FHA guidelines. This may include W-2s, pay stubs, unemployment income receipts, or other. Your lender will help you determine the best method of verification.

How do I document a “satisfactory” credit history since my “economic event” for the FHA?

Your lender will review your credit report as part of the FHA Back To Work approval process. All accounts will be reviewed — ones which went delinquent and ones which remained current. Your lender will attempt to determine three things — that you showed good credit history prior to the economic event; that your derogatory credit occurred after the onset of the economic event; and, that you have re-established a 12-month history of perfect payment history on major accounts. Minor delinquencies are allowed on revolving accounts.

Does the “20 percent loss of income” eligibility condition apply to me only, or to everyone in the household?

The “20 percent loss of income” eligibility condition applies to everyone in the household. If one member of the household lost income as the result of a job less but the household income did not fall by 20 percent or more for a period of at least months, the borrower will not be FHA Ba Extenuating Circumstances-eligible.

Is the FHA Back To Work Program limited by loan size?

No, the program is not limited by loan size. The FHA will always insure up to your area’s local FHA loan limit. Your lender, however, may not. If your lender will not make a loan big enough for your needs, find another FHA-approved lender. There are many of them.

With the FHA Back To Work Program, how soon until I can buy a home after foreclosure?

Via the program, you can buy a home 12 months after a foreclosure.

With the FHA Back To Work Program, how soon until I can buy a home after a short sale?

Via the program, you can buy a home 12 months after a short sale.

With the FHA Back To Work Program, how soon until I can buy a home after a deed-in-lieu of foreclosure?

Via the program, you can buy a home 12 months after a deed-in-lieu of foreclosure.

With the FHA Back To Work Program, how soon until I can buy a home after Chapter 7 bankruptcy?

Via the program, you can buy a home 12 months after filing for Chapter 13 bankruptcy.

With the FHA Back To Work Program, how soon until I can buy a home after Chapter 13 bankruptcy?

Via the program, you can buy a home 12 months after filing for Chapter 13 bankruptcy.

Is there a counseling requirement in order to use the FHA Back To Work program?

Yes, in order to the use the program, you must agree to attend housing counseling.

Will my housing counselor help me shop for mortgage rates?

No, your housing counselor will not help you shop for mortgage rates. However, many counselors can help you read a Good Faith Estimate which may help you make better lending decisions.

Why do I need to take housing counseling?

The housing counseling required by the FHA Back To Work program will address the cause of your economic event, and help you consider actions which may prevent reoccurance.

How long is the housing counseling session I am required to take?

The housing counseling required will typically last one hour.

Do I have to take housing counseling in-person?

No, you do not have to take the housing counseling in-person. Housing counseling may also be conducted by phone or via the internet.

If I complete counseling, am I automatically approved for the FHA loan?

No, you are not automatically approved for the FHA loan if you complete the housing counseling required. You must still qualify for the FHA mortgage based on Federal Housing Administration mortgage guidelines.

What is the minimum credit score requirement for the FHA Back To Work program?

There is no minimum credit score requirement for the FHA Back To Work program, necessarily. The program follows standard FHA mortgage guidelines. Credit scores below 500 are not allowed, but borrowers with no credit score whatsoever remain eligible. The Federal Housing Administration doesn’t change mortgage rates based on credit score.

Are modified mortgages eligible for FHA Back To Work?

Yes, modified mortgages are eligible.

Are loans on a payment plan eligible for FHA Back To Work?

Yes, loans on a payment plan are eligible.

I lost my job because my employer went out of business? Does this qualify for the program?

Yes, job loss resulting from an employer going out of business is Back-to-Work eligible. Your lender will ask you to provide a written termination notice or publicly-available documentation of the business closure.

Can I use Unemployment Income receipts to document that I was out of work?

Yes, you can use Unemployment Income receipt to document that you were out of work.

I am unemployed. Can I still use the program?

Yes, you can use the FHA Back To Work program if you are unemployed.

I am still in Chapter 13 bankruptcy. Do I need the court’s permission to enter into the mortgage?

Yes, if your Chapter 13 bankruptcy has not been discharged prior to the date of your loan application, you must have written permission from Bankruptcy Court to enter into the purchase transaction.

When does the FHA Back To Work – Extenuating Circumstances program end?

The FHA Back To Work – Extenuating Circumstances program ends September 30, 2016.

CLICK HERE to read the release from HUD

SOURCE: The Mortgage Reports

5 Ridiculous Seller Sayings That Kill Deals!

When I need a good laugh, I like to read Vanity Fair magazine’s ‘Actual Complaints from Actual Rich People’ column. The monthly column is a super-short, super-funny compilation of woes of the very rich, as overheard by the author.  My guess is that most of these sayings seemed totally sensible to the person who said them in the course of the conversation. In retrospect and out of context, though, they seem crazy and out-of-touch, even ridiculous.

Here’s a recent example: “I don’t ask my wife how many horses she has, she doesn’t ask me how many cars I have.”

Ridiculous, right?  Well, while these folks are easy to poke fun at, many of us say things during a heated moment or emotional experience that we have a hard time standing behind later. Selling your home is one of those experiences that causes even the most stable, calm human being to feel panic, outrage, anxiety, and sometimes all of the above, all at the same time.

These volatile emotions give rise to a handful of seller sayings that seem silly when seen in a sober light.  Here they are, along with some insights to help you ensure you don’t let them foul up your home selling decisions.


 

Don’t Let Emotions Sabotage Your Sale!

1.  But I spent X years or $X on that!  The ability to customize your home to your personal tastes and your family’s wants and needs is one of the biggest non-financial perks of home ownership.  Creating a soundproof meditation room or a floating pool theater is your right as a home owner.

MOO-15750039I encourage owners to make changes to their homes that will improve their quality of life while they live there, rather than fixating on whether they’ll be able to recoup their investment when they sell it 20 years down the line. (Of course, if you’re planning to sell in the near future, it might not make sense to invest in super-personalized home improvement projects.)

That said, the fact that YOU loved the idea of having a sports court, billiards room or Japanese garden enough to spend tens of thousands of dollars on it does not necessarily mean that your home’s buyer will place the same value on it – or any value, for that matter. I was once involved in a sale where the sellers had spent decades cultivating a beautifully complex Japanese garden which the buyers, busy professionals, had no time or interest in maintaining.

Not only were they not willing to pay a premium for it, they planned to rip it out and replace it with low-maintenance, low-water landscaping.

Let it go. Understand that other than the kitchen, bathroom, amenity and decor upgrades that appeal to many home buyers, if you’ve invested your time or money in customizations for your own personal enjoyment, then your enjoyment is your return on that investment.  If your home’s eventual buyer also happens to love them, fantastic!  But don’t approach the home selling process expecting every buyer to share your value system and pay through the nose for them.

 

2.  We just need to find a buyer who understands my tastes.  There are certainly occasions, with rare properties, where there is truly a narrow niche of buyers that will have to find, understand and appreciate a property. In cases like that, with acreage, converted warehouses, horse properties, and the like, this saying is not ridiculous at all.

But this saying is ridiculous when it is uttered by the owner of a home with potentially wide appeal as a reason for not staging or preparing their home for sale, or in the effort to avoid neutralizing highly, uh, personal design and decor choices.

If your home is lagging on the market while others sell, and your agent has suggested that you tone down the polka dot paint job or delete the Al Pacino mural on your dining room walls, think about how much time and money your decision to wait for the buyer who understands these design choices is costing you.

Rethink your position: as the ultimate marketing decision-maker in your home’s sale, your job is to maximize your home’s appeal to a broad segment of ready, willing and able buyers (not to find the one needle in a haystack who likes the Godfather as much as you). You’re moving on from the property, so move on emotionally, too. Don’t let your emotional attachment to your decor decisions or stubborn refusal to spend on staging keep your life or your finances stuck.

3.  I want to price it high, so I have room to come down.  Now, in all fairness – there’s a time and a place for this.  By that I mean that there are certainly local markets where it’s very much standard practice for buyers to expect to come in below asking, and sellers can price their properties a few thousand dollars higher than the target price point without killing their deals.  If you live in a place like this, your agent will surely work with you to price accordingly.

That said, when the market is slow enough that buyers are routinely paying below asking for homes, pricing your home above-market is actually dangerous. It runs the risk of causing no one to view your home as a good enough value to see it in the first place.

If other sellers are pricing appropriately and yours is priced too high over what the market will bear, many buyers won’t even bother trying to negotiate you down.  Rather, they’ll go find one of the homes on the market with a more realistic price, they’ll wait until you lower the price or they’ll wait until your home has been lagging so long they sense you might be desperate, and will swoop in with a lowball offer of their own.

Even in a relatively hot market climate like today’s, the aggressively priced homes get the most buyer traffic and, accordingly, get the most offers. In turn, these bidding wars drive the eventual sales price up. If you want to sell your home in a buyer’s market, or sell it at top dollar in a seller’s market, overpricing it might actually sabotage your success.

4.  That offer is an insult – I won’t even dignify it with a response. Your home might be very personal to you. It represents a massive investment of your money, time, hopes and dreams. It probably also represents your personal tastes, style and some precious memories of your family’s life.

But once it’s on the market, get a thick skin and decide not to take anything – anything – personally. If someone offers to pay many thousands of dollars for your home, it’s not an insult, even if the offer is far afield from what you are willing to sell the home for, or from what you believe it is worth. They might be deeply misguided, and not yet experienced enough in the market to know that the offer was unreasonable. Or they might just love your home and be going for it, even though it’s really outside of their personal resources.

Finally, they might actually just be trying to get you to come down a bit on the asking price. Some buyers see making a very low offer as part and parcel of negotiations.

In any event, you should always respond to an offer made by a qualified buyer. If you have another offer or offer(s) that are more realistic, just respond with a pleasant decline.  If you have no other offers, respond with what you and your agent formulate as an appropriate counter.  You might be surprised at how even a very low offer can come together with a respectful, reality-based counteroffer and a little negotiating.

5.  I need $X to get the home I want and take my Australia trip – let’s list the place for that.There are lots of respectable strategies for setting a list price, but all of them have their basis in one thing: data. They all start with a look at the nearby, similar homes that have recently sold, and what they sold for; this is what agents call “comparable sales data.”

Depending on market dynamics, trends in inventory and home values, how similar/dissimilar your home is to the recently sold properties and what your own priorities are (e.g., sell fast, sell for top dollar, etc.), an experienced local agent might advise you to start with “the comps” and adjust your home’s list price down a bit, or to start with “the comps” and adjust upwards to get to your home’s list price.

But never will a savvy, experienced agent tell you that the proper way to price your home or understand its value is to do the math on how much cash you want and need, and set your list price by that.

Of course – you need to do your “move up math” in the process of listing your home in order to know whether your home sale is feasible or not. And you might actually have to factor in what you need to pay off your mortgage and move into your pricing decisions – that’s not bizarre.

But you should do so only with the awareness that your home’s ultimate value is based on what a qualified buyer is willing to pay for it – not what you need to move.

SOURCE: Trulia

Wells Fargo eliminates 2,300 mortgage jobs

Wells Fargo is cutting 2,300 jobs from in the mortgage production unit, the company said on Wednesday.

San Francisco-based Wells Fargo was the largest employer among U.S. banks at midyear with about 274,000 people. That figure jumped 4 percent from the previous year and was little changed from end of the first quarter.

The latest round of cuts brings the total number of jobs cut by the country’s largest mortgage lender to 3,000 since July.

The company expects the pace of mortgage lending to slow for the remainder of the year as higher interest rates cut into the demand for refinancing.

Applications for U.S. home loans fell for a second straight week as higher interest rates reduced refinancing activity, an industry group reported Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 4.6 percent in the week ended Aug. 16.

The decline came as 30-year mortgage rates rose 12 basis points to 4.68 percent, matching the year’s high first hit in July.

Banks May Ease Lending Standards Soon

With fewer home owners refinancing their mortgages because of rising interest rates, banks may soon relax their lending standards to ramp up business, according to the Mortgage Bankers Association.

Credit availability has risen 3 percent since May — when mortgage rates began to rise — according to an MBA survey. Refinances have fallen 59 percent from a year ago, but applications for home purchases have risen 5 percent.

In recent years, tight underwriting standards have been blamed on shutting out many people from the housing market. Many potential borrowers have been unable to meet requirements for higher credit scores and larger down payments in order to qualify for a loan.

“As volumes slow, it makes sense that originators might ease some of their overlays as they now have the additional bandwidth to focus on slightly lower-quality loans or those loans that require more intense underwriting prior to approval, such as loans for self-employed individuals or investors that own multiple homes,” Craig Strent, CEO of Maryland-based Apex Home Loans, told CNBC. “Competition for loans, particularly for home purchases, will continue to rise as refinances wane and originators look for continued loan volume to support the infrastructure they put in place during the recent refinance wave.”

SOURCE: Daily Realtor News

Mortgage Rates Could Go Up if Fannie and Freddie Are Shut Down

Homebuyers could feel the pinch if Congress follows through on plans to shut down Fannie Mae and Freddie Mac, the government-controlled mortgage guarantee giants that were rescued by a $187 billion taxpayer bailout during the financial crisis.

Borrowers would probably end up paying slightly higher mortgage rates under House and Senate bills that would phase out Fannie and Freddie over five years and shrink the government’s huge role in guaranteeing mortgage securities. Fannie and Freddie teetered under a crush of massive losses on risky mortgages before being bailed out.

The House Republican bill would virtually privatize the mortgage market. The Senate’s bipartisan plan envisions a continued but more limited government role in insuring mortgage securities. Supporters say that would keep mortgages available and affordable.

Congressional efforts to overhaul the nation’s mortgage finance system got a boost Tuesday from President Barack Obama’s call for changes that are generally in line with the Senate’s bipartisan plan.

30-year fixed-rate mortgages could become harder to find and more expensive for borrowers

“For too long these companies were allowed to make huge profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was ‘heads we win, tails you lose,’ and it was wrong,” Obama said. “The good news is right now there’s a bipartisan group of senators working to end Fannie and Freddie as we know them. And I support these kinds of reform efforts.”

The idea behind both plans is to shift more mortgage financing risk from the government to the private sector to prevent taxpayers from having to pay for future bailouts. But there’s a price homebuyers would likely pay for having private investors shoulder more risk to protect taxpayers.

“It will mean higher mortgage rates,” said Mark Zandi, chief economist at Moody’s Analytics. “The question is how much higher.”

30 year loans could become a thing of the pastTypical borrowers could pay about $75 per month in extra interest payments, about half a percentage point, on an average mortgage under the Senate proposal, Zandi estimated, and about $135 more under the House plan. That’s on a conforming loan of about $200,000 with the borrower providing a 20 percent down payment.

“You have to assume that almost in any future model being drafted, loans will be more expensive,” said David Stevens, CEO of the Mortgage Bankers Association and a former Obama administration housing official.

Most Democrats tend to favor a continued government role backstopping the mortgage market because they say it stabilizes the housing market. Many House Republicans, especially conservatives, want to end government involvement and let the free market rule. Given the split, the rival bills stand as opening markers in a long fight.

“We all agree that the system with Fannie and Freddie needs to be changed,” said Rep. Michael Capuano, D-Mass., ranking Democrat on the House Financial Services subcommittee on housing and insurance. “The real question is, do we reform it or kill it the way House Republicans want to.”

Rep. Maxine Waters, D-Calif., the ranking Democrat on the Financial Services Committee, said the vast majority of housing industry groups such as real estate agents, mortgage bankers and homebuilders support keeping a government role insuring mortgage securities.

House Republicans, led by the chairman of the House Financial Services Committee, Rep. Jeb Hensarling, R-Texas, say their bill to vastly reduce the government’s involvement in the mortgage finance system will be a boon to consumers, spurring competition and innovation in the private sector and giving borrowers more choices. They blame Fannie and Freddie for inflating the market before the housing crash, contributing to the boom-bust cycle.

Hensarling, in a statement Tuesday, said his plan “puts private capital at the center of the housing finance system, ends the bailout of Fannie Mae and Freddie Mac and sustains the 30-year fixed rate mortgage – all goals the president today says he supports.”

Hensarling’s bill recently cleared his committee without any Democratic votes and is expected to get a House vote in the next few months.

Housing advocates warn that if the government’s role is scaled back too far, mortgages could be pushed out of reach for people with lower credit scores and smaller savings for down payments.

They say 30-year fixed-rate mortgages, long a staple of the housing market, could become harder to find and more expensive for borrowers with modest incomes because lenders would be less willing to offer such longer-term loans without government guarantees.

“Those people are now going to be locked out of the system or many will end up paying a premium because of these changes,” said John Taylor, chief executive of the National Community Reinvestment Coalition, a housing advocacy group.

Fannie and Freddie own or guarantee nearly half of all U.S. mortgages and 90 percent of new ones. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps banks get rid of risk from their balance sheets, freeing up more money to lend.

During the financial crisis, as house prices tanked and foreclosures surged, the government rescued Fannie and Freddie from a flood of defaults on risky loans the agencies had guaranteed, many aimed at providing affordable housing for lower-income borrowers.

Like many banks, the two companies had relaxed their standards on loans they bought or guaranteed during the boom. High-interest loans, some with low “teaser” rates, were given to risky borrowers.

Now under government control, Fannie and Freddie are hugely profitable, and thanks in large part to the housing recovery they’re pumping billions of dollars into the U.S. Treasury. Fannie and Freddie have paid the Treasury $132 billion, more than two-thirds of the bailout.

In the Democratic-controlled Senate, a bipartisan bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would gradually replace Fannie and Freddie over five years with a new agency having a more limited role insuring mortgage securities against catastrophic losses.

The bill would create a new Federal Mortgage Insurance Corp. that would provide backstop insurance available only after a substantial amount of private capital is used up. Investors would pay insurance fees to the corporation while agreeing to put a substantial amount of their own capital at risk.

The bill in the GOP-controlled House nearly eliminates the government’s role in the mortgage financing system. It would limit the Federal Housing Administration to insuring loans only for first-time and lower-income borrowers.

SOURCE: USA Today