While most policy-watchers foresee little legislative action before the November 2013 election, the housing industry has seen movement on some fronts in the past few weeks.
The Home Affordable Refinance Program (HARP), announced in March 2009, represents the Administration’s effort to enable “underwater” homeowners—those who owe more than their home is worth; currently estimated to be more than 1 in 5 borrowers in the U.S.—to refinance their loans and benefit from lower interest rates. The reasoning behind the program is that with lower monthly mortgage payments it is anticipated that (a) homeowners will increase spending on other goods and services, helping to stimulate the economy; (b) struggling borrowers will be less likely to fall behind on their payments; and (c) severely underwater homeowners will be less tempted to engage in “strategic defaults,” helping to stabilize the housing market.
As originally designed, the program fell short of meeting its goals, serving fewer than 1 million of the 5 million borrowers originally targeted. In late October 2011, the Administration announced its intention to revisit the provisions in HARP and broaden eligibility requirements in a revised program referred to as HARP 2.0. From the borrower’s perspective the key change, which kicks in on December 1, is elimination of the 125 percent loan-to-value ratio for most fixed-rate mortgages. This change extends eligibility to borrowers whose home values have fallen significantly.
HARP 2.0 continues to apply only to mortgages held by Fannie Mae and Freddie Mac and sold to the GSEs before April 1, 2009. Fannie and Freddie have also taken steps to encourage lenders to participate by waiving rep and warrant liability on mortgages with a loan-to-value ratio above 80 percent; without the waiver, lenders would be responsible for buying back loans found to be fraudulent or missing documentation. The program is set to sunset at the end of 2013. More details are available here.
Passage of the mini-bus bill
On Friday, November 18, President Obama signed an appropriations bill that provides funding for HUD and a handful of other agencies in FY 2012. The bill makes sharp cuts to the HOME and CDBG programs (funded at 38 percent and 12 percent below the FY2011 levels, respectively), leaves funding for Housing Choice Vouchers and project-based Section 8 renewals essentially unchanged, and restores funding for HUD’s Housing Counseling program. The bill also eliminates funding for HUD participation in the Sustainable Communities Initiative, a joint program administered with the Department of Transportation and Environmental Protection Agency, although some funding for the Office of Sustainable Housing and Communities is provided. A detailed summary is available from the Congressional Research Service.
Increase in FHA loan limits
Passage of H.R. 2112 also ends—for the moment—debate over whether to raise loan limits for federally-guaranteed mortgages. The bill reinstates maximum loan limits of $729,750 in high-cost areas for mortgages insured by the FHA; however, those same increases are not extended to Fannie Mae and Freddie Mac. Loans up to $417,000 or $625,500, depending on the market, will be eligible for purchase by Fannie and Freddie. Increased limits for loans eligible for FHA backing will be extended through the end of 2013.
Lawmakers and industry groups have been arguing over whether to reinstate increases in loan limits first extended in 2008, which expired on October 1, 2011. Those opposed to a continuation of the higher limits suggest that a reduced federal role is required to stimulate renewed private sector participation in the housing market and protect taxpayer dollars, while supporters point to the ongoing fragility of the market and the need for continued federal support to prevent further declines.
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