Sometimes I don’t understand Congress and the government.
Ok, often I don’t understand them…
Case in point:
The flurry of activity in the hollowed halls of the U.S. Capitol building over the last couple of months to get the first-time homebuyer’s tax credit extended (and expanded beyond first-time buyers) was touted as necessary to help people buy homes and turn around the ailing real estate market – and the U.S. economy. Billions of dollars have been spent on this program, with billions more to come.
Think your elected officials don’t believe the tax credit helps the housing market, and hence the economy? In their own words:
"Already, the homebuyer’s tax credit has helped to stabilize the housing market. . .This extension and expansion will help our economy grow and allow many more middle-class families to realize the American Dream." – Senator Chris Dodd (source)
“The key to returning stability to the economy lies within the housing market, and we have crafted a meaningful credit that will create a strong foundation for future growth and make a measurable difference over the next seven months in our economy.” – Senator Johnny Isakson (source)
“The bill also a places a down payment on the future of our middle-class because it extends, for the first-time homebuyer, a tax credit helping more Americans purchase homes and making it a little easier for families to move into a new house and keep a roof over their heads. This initiative has already been successful. We’ve seen the positive impact — the steadier foundation in our housing market. Most significantly, we’ve watched a new generation of Americans start living out their dream of homeownership and economic security.” – Speaker of the House Nancy Pelosi (source)
I happen to think they are wrong, but hey, they are as entitled to their opinion as I am to mine.
OK, so the folks in Washington are looking out for us, passing laws they feel will spur the housing market toward recovery. Good for them. While it may seem at times their primary job is to get re-elected, let’s give them the benefit of the doubt and say they have the American public’s best interest in mind.
Why then this recent about face?
Enter H.R. 3706 – The FHA Taxpayer Protection Act of 2009. This bill, referred to the House Committee on Financial Services on Oct 1, would require borrowers with FHA insured mortgages to make down payments of at least 5% and would prohibit rolling closing costs into the loan.
Currently the minimum FHA down payment is 3.5% of the purchase price and closing costs can be rolled into an FHA loan.
While it is by no means statistically significant, I can tell you the vast majority of FHA buyers I’ve worked with can barely scrape together the 3.5% down payment. Bump that to 5%, and add in the fact they would need a few thousand more to cover closing costs and this bill, if passed, would have to reduce the number of people able to purchase a home with an FHA loan.
But wait, there’s more…
In addition to HR 3706 (you’ve got to love the name – Taxpayer Protection Act), the Secretary of Housing & Urban Development Shaun Donovan on Wednesday outlined further plans by the Administration to make sure FHA home buyers had “more skin in the game” and to shore up the FHA’s dwindling reserves.
The highlights of the FHA policy proposal:
- Reducing the maximum allowable seller concessions from it’s current 6% of sales price to 3%.
- Raising the minimum FICO score (“credit score”) required to qualify for an FHA loan.
- Increasing the up-front cash that a borrower has to bring to the table in an FHA backed loan.
- Investigating an increase in the up-front mortgage insurance premium a buyer is required to pay.
- Asking Congress to raise the annual mortgage premium a FHA buyer has to pay.
Most of these changes the FHA can make on their own with no additional authority or legislation required. Donovan said they will provide detail and public guidance for these changes by the end of January.
So……
On one hand we’ve got the government passing a tax credit that, in their opinion – as well as that of the National Association of Realtors (NAR) – will do wonders for the housing market and overall economy.
On the other hand, we’ve got the FHA making significant changes on the ability to qualify for, and increasing the cost of securing an FHA loan. And there is also a bill in the House to pile on even more costs to FHA buyers. This for a loan program that, according to the NAR, 50% of all first-time buyers used to buy a home in 2008.
Maybe it’s just me, but these two actions seems to be diametrically opposed to each other. Is the fed attempting to “rob Peter to pay Paul”, do they even think about the consequences of actions and legislation on other programs they have enacted, or are they just completely clueless?
I don’t get the government. . .
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{ 27 comments… read them below or add one }
It’s simple Jay. Washington thinks it can run everything when in reality no one there is qualified to run anything. No one there has ever started a small business, had to meet payroll, etc. No one there has even an inkling of what it’s like to operate in the real world.
Didn’t you hear? Our Treasury Secretary uses Turbo Tax to pay his bills; clearly he is just like us regular guys! So what if he failied to pay over 30 grand in back taxes he owed on self-employment tax but still got appointed for arguably the 2nd or 3rd most important job in our country? He’s obviously smart enough to run as the CFO of our nation, he just made a common “mistake”…
(sarcasm off)
First as you know we agree politically and we agreed about the credit not being extended. But I have to say I like what they are doing here with making fha’s harder. Some people should not be buying a house, and with the cost of home ownership that can occur and most people do not budget for, if you want to buy a house you SHOULD be able to put 10% or more down (I think 5 is to low) or maybe you should consider renting until you can afford it.
And these loans backed by the FHA are not backed by the government, they are backed by me and you… and if I am loaning money I want the borrowers to have more skin in the game and be solid financially.
I’m with ya Dean. I’m not necessarily saying the FHA adjustments are bad, it’s the talking out of both sides of their mouths that I find annoying. Authorizing billions in one action then reducing the numbers that can get a loan with another. Seems conflicting…
Dean: I disagree with you on the FHA. I paid 2 FHA loans off in the course of my home ownerships. I also paid a hefty PMI. I also paid several conventional loans off. I am not an investor, I just move around the country a lot. So we tax payers made some money on me. Who are YOU to say who should and should not own a home ? Our Loan Shark mortgage brokers and investors are the ones who got us into this mess. Both their greed and influencing consumers to sign Jumbo ARMS (their dreams) that they could not afford after the first year of living in these homes is most definitely what got us into this mess!!! And of course now the investors want to purchase the “FORECLOSURES” and rent them back to the suckers who bought them in the first place and the government still is letting them get away with it and fraudulently claiming the 8,000.00 credit!!!!!!!!! Very very very sad indeed.
Mortgages are much less than rentals these days. Most landlords in our area are having to substantially lower rents and offer specials just to keep their properties full. This is not because people are buying homes in our area, but because many who came here have left since they have lost their jobs. Many have retuned to Mexico!!!! Some of our neighborhoods are like ghost towns. Apartment complexes are the same. Where have all the people gone? And yet the investors continue to buy!!!!!!!! Very soon they are going to be lucky to cover their mortgages on these houses………….and cannot look to the near future to sell them even if the FHA makes it more difficult to purchase a home!
And Dave I need to agree with you completely, honestly some of the best and brightest are in washington… so say no one? Come on let’s not over dramatize, lets go out and find more to support that can work with the good ones we have there
Sorry Disagree with Dave not agree
see above.
Its because some are working for themselves, some are just puppets for the corporations that put them there, and some are honestly trying for the common good (though it is debatable as to whether or not they even know what that is). The issue that I see most of the time is the special interests. People using their positions to make money and make money for their friends and family at the expense of the rest of us, all while pretending that they are helping. The problems are not even along party lines, they are all baboons.
-Tyler
I’ll go with the clueless answer. The three quotes you used above come from three people that don’t know much about the economy. At least they’re past statements lead me to believe that they don’t know much.
Can’t buyers use the tax credit for a down payment and closing costs? If so, it’s basically a wash.
“Can’t buyers use the tax credit for a down payment and closing costs? If so, it’s basically a wash.”
Not really. A home has to close to get the tax credit, making that money unavailable for down payment or closing costs. There are some states that have programs to basically allow a short term loan of the tax credit money to be secured up front. Or there was before the credit extension. Not sure how the changes in the extension affected those programs.
Insightful juxtaposition!
Which makes me think these proposed FHA changes are probably just political maneuvering. FHA may not really intend to make the changes. Their real purpose may be to justify their future bailout; “Hey, if you Congress dudes don’t bail us out, we’re going to make all these changes and blame them all on you. Naner, naner, naner.”
Political maneuvering in Washington? Say it so John! Interesting thought….
Great read Jay. I think they walk a thin line between trying to stimulate/help borrowers get into homes and making sure the highest percentage of those borrowers as possible can actually afford the home. Personally I like the increase in down payment because I know that it decreases the likelihood of someone getting into a house that they can’t afford. If you do not have enough excess income to save up 5% over time then maybe you are not in a financial position to purchase a home (yet).
Where’s the “like” button on this post?
Dean and I think alike on this – I hope these new regulations keep people out of homes they can’t afford. And clearly the tax credit is another form of wealth redistribution. The way these politicians talk out of both sides of their mouths IS annoying, regardless of which outcome you’re looking for.
Hr 3706 has 28 sponsors/co-sponsors. 27 Republicans (including my own rep John-”the baby whisperer”-Shadegg, and Trent Franks) and 1 Democrat. This bill is probably not going anywhere.
3.5% of a $277k home (Dec 2007 Phoenix median) = $9,695
5% of a $183k home (Dec 2009 Phoenix median) = $9,150
The actual dollars are not changing that much. If someone could scrape together the down payment 2 years ago, they could likely still do it today.
It is weird that Rep. Garrett voted for the extension and then offered this bill. Most of his co-sponsors voted NO or abstain on the bill that contained the extension (again Shadegg & Franks).
Stephen –
According to this site with a vote tally for the tax credit extension, Garrett Scott (the author of the FHA bill) voted AGAINST the extension.
Also, you said “Most of his co-sponsors voted NO or abstain on the bill that contained the extension”. By my count, there were 3 co-sponsors that voted against the extension, and 2 that abstained, leaving 23 co-sponsors that voted FOR the tax credit extension.
Hence my wonderment about the “double-speak”.
I was looking at the original vote for passage on the bill from September. Vote #722.
http://www.govtrack.us/congress/vote.xpd?vote=h2009-722
To be fair to Garrett & the rest, there were several things wrapped up in that bill. I can’t really tell whether or not their votes were strictly about the tax credit or about extending unemployment benefits or anything else in the bill.
I’m not really defending Garrett’s bill, but there are worse ideas than wanting people to shoulder a little more risk in a market where a house can easily go upside-down on a mortgage.
Personally, I think the FHA is supposed to be there to assist people to buy a home. Helping people get into house, especially when they are as affordable as they are right now, is probably the better course of action. The 5% down limit should have been put in 6-7 years ago when housing prices started going crazy as a way to reduce demand and stabilize prices.
Jay,
Does seem that they are sending conflicting messages.
I’m guessing that this amendment will go into effect after the expiration of the first-time home buyer tax credit? If this is the case, maybe their idea is similar to how they’re handling the Fed Rate. Just as the rate is zero now, as soon as they’re satisfied that the economy is doing a little better, they’ll jack up interest rates to avoid inflation. So maybe they felt the housing market needed a just little more juice to stand on its own (thus the extension),then, they will quickly reign it in (thus the new legislation). Not saying I agree with it, just guessing at what they’re thinking.
Also, you should take a look at this article: http://www.cbsnews.com/stories/2009/11/29/eveningnews/main5826890.shtml?tag=contentBody;featuredPost-PE
Considering that the FHA’s exposure has quadrupled in the last 3 years, they are clearly concerned about their exposure/independence and long term viability….and probably about time.
Doug
Just saw Stephen’s comments. Assuming true, this whole things makes a little more sense.
Doug
Jay,
I have to completely disagree with you on this one. Realtors need to get their hands out of their pockets for once and think big picture. If a person can’t afford a home they have no business buying one. I’m all for helping people get into homes! But not if they can’t make the payments. If you can’t “scrape” together 5% then how in the world can you do the upkeep and have anything left over in case “life happens”? We all need to stop living paycheck to paycheck and start paying our way as we go. And this is coming from a democrat!
John
Dr. McMillen –
I appreciate your comment! I didn’t do a very good job of making my point here… I was trying to point out the hypocrisy of passing one law that (arguably) helps the housing market and another that (arguably again) hurts it. This is the primary reason I wish the government would just step out of the way and quit mucking around in a free market.
I’m inclined to agree that the tighter FHA regs are good. It was lax lending practices and WAY too many “no money down” mortgages that helped get us into this mess.
Buying a home is a privilege that has to be earned, it’s not a right. And this coming from a real estate broker!
With all political views aside, I think they have no idea what they are doing. It would be like giving an animal a piece of bread and then trying to kick the animal when it’s eating. Oh lets help the housing market by ext. the tax credit but by the way good luck getting qualified.
Great post and I like the updates to the site Jay!
My take on the ‘proposed’ changes to FHA is a progression toward buyers having more of a vested interest in what their purchasing. Although, this will make conventional financing a contender once again. I’d like to see the apples-to-apples comparison between the two once these changes are finalized.
Great site, Jay! I’m waiting to hear what you have to say about these new RESPA changes effective Jan 1st. What say you?
I’m working on that RESPA change post at this very moment Brenda!
I think there should be way more public say when it comes to billion dollar govt plans. We all know that Politian’s have one eye on their own interests so why not put more initiatives to the public vote, or at least have a more public debate where real people can share their concerns?
James
.-= DP Mortgage Life Insurance´s last blog ..Mortgage Life Assurance =-.
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