Today, after weeks of speculation, the FHA announced their plan to secure the solvency of the Insurance Fund. And it is NOT good news for Homebuyers, and therefore, NOT good news for sellers either. I’ll discuss the particulars in a minute; but first, let’s look at how this is the THIRD nail in the coffin for First Time Homebuyers (who we all know have fueled the market for the past year).
Nail 1- The end of the First Time Homebuyer Tax Credit. While there is some debate on how big an impact the Tax Credit has had, there can be no debate on how its elimination (when combined with the other two nails) appears devastating to continuing the momentum.
Nail 2- The slowing, and eventual end, to the Federal Government’s purchase of Mortgage Backed Securities. In 2008, 99% of all loans sold in the Secondary Market were bought by Uncle Sam. When he moves to the sidelines on March 31, rates will climb swiftly. It’s the only way to attract other buyers of MBSs back into the market. Bottom line mortgage rates 1-1.5% higher than most buyers have become used to……and home sellers reluctant (or financially unable) to reduce prices 10-15% further to compensate.
Can anyone else see the faucet being turned off?
Today, we add the third nail. Basically to lessen defaults on FHA loans (which have constituted more than 50% of the loans closed in some markets), guidelines are being tightened….even though we don’t have a definitive date for it yet.
1. Lower FICO scores (below 580) will now require a 10% down payment….a significant jump from the current 3.5% down payment.
2. The Up Front Mortgage Insurance Premium is being raised from 1.75% to 2.25%. While this amount can be financed into the loan, it still raises the cost of home buying.
3. The allowable seller’s concession (by which sellers have been able to pay closing costs on behalf of their purchaser) has been slashed from 6% to 3%.
While I understand requiring more cash in the deal for people who have not demonstrated good credit histories and raising the insurance costs to defray losses, I personally do not believe in reducing the allowable seller’s concession. I acknowledge that by having more of the buyer’s money in the deal may make them more likely to fight to stay in the home, rather than walk away, I cannot believe that that potential benefit outweighs the number of people who will be forced to continue to rent because they cannot save up an additional 3%. Taking buyers who would qualify for financing based on their income and credit, and keeping them in apartments when the market so desperately needs them to buy NOW doesn’t make sense to me.
Regardless, we need to adjust to the landscape. Buyers who were even debating buying need to find a home, get into contract and apply for a mortgage today….waiting even for April 30 could be disastrous. Home sellers need to price their homes to sell TODAY and not “wait for spring”. At this point, I can see a first-time buyer who waits until May losing the $8000 tax credit, having to need 3% more cash, and paying a 1% higher rate……my advice, don’t look back with regret. ACT and celebrate your decisiveness.
