As part of the recently passed Economic Stimulus Bill, the loan limits on Reverse Mortgages have been raised to $625,500. The previous limit was $417,000 based on the Fannie Mae/Freddie Mac conforming loan limit. The new limit is set at 150% of the Fannie/Freddie limit, so it will adjust with the conforming loan limit.
This is a huge jump for us here in Josephine County where the limit has gone from about $271,050 to $417,000 and finally to $625,500 in a matter of months.
What this means is that seniors can access more of the equity in their homes. In our area it seems that many of the most expensive homes are owned by retirees, and the previous loan limits represented a small fraction of those values. Now more people can get a reverse mortgage large enough to pay off their existing loans and maybe even leave them with some extra cash.
While this improvement won't do much for the housing market, the extra cash it frees up for seniors could translate into much needed consumer spending in the larger economy. Also, a reverse mortgage can be a great tool for avoiding foreclosure, and the higher limit makes that option available to more people.
Thursday, February 26, 2009
Thursday, February 19, 2009
Obama's New Mortgage Plan
Yesterday President Obama unveiled his new Homeowner Affordability and Stability Plan. Giving money to the banks to encourage lending has been a complete failure, so this new plan aims to help individual homeowners instead. Helping homeowners will, in turn, help the banks and the overall economy. That is, of course, if it works.
This plan has two main parts. The first is designed to allow homeowners to refinance at today's low rates even if they've lost much of their equity to declining home values. The other is aimed at struggling homeowners and involves modifying loans and subsidizing payments to bring them in line with the borrower's income.
To me the first part is the most exciting as previous efforts at modifying loans have not been very successful. According to one report 58% of loans that were modified are right back in default within six months. Maybe with government subsidies the modifications will be significant enough to really make a difference.
In fact, the goal seems to be to bring the housing payment down to 31% of the borrower's income, which sounds like a good target. Hopefully they will also look at the total debt-to-income ration and not just the house payment. If another 31% of income is going out to car loans and credit cards then you're up to a 62% debt-to-income ratio, which is not sustainable. Unfortunately the people who buy more house than they can afford are often the same ones who overindulge in other credit as well. These are the details that we haven't heard yet and that will determine whether or not this part of the plan is effective.
Many important details are yet to be announced on the first part of the plan as well. They say it will allow people to refinance even if they owe more than 80% of the value of their home. We can already do that right now. The only issue is that you pay Private Mortgage Insurance (PMI) if you borrow more than 80%, and that can often make the refinance less attractive. So will this plan remove the requirement for PMI on high loan-to-value loans? What would the rate be on a mortgage that is 105% of the value of the home? What kind of income, assets and credit would be required? Who will process and underwrite these loans?
Details aside I think it's the right approach. People who's only mistake was buying at the wrong time deserve the help at least as much as those trying to hang on to a house they probably shouldn't have bought in the first place. Also, allowing 4-5 million homeowners to lower their house payments is a great stimulus for the economy. A refi to a lower rate will save the average family a lot more than any tax cut, and all that money will be available to go back into the economy right away.
The basics of the plan and it's goals are great: help struggling homeowners avoid foreclosure, help responsible homeowners impacted by sagging home values, and stimulate the economy at the same time. Hopefully the details and execution of the plan allow it to live up to it's potential.
This plan has two main parts. The first is designed to allow homeowners to refinance at today's low rates even if they've lost much of their equity to declining home values. The other is aimed at struggling homeowners and involves modifying loans and subsidizing payments to bring them in line with the borrower's income.
To me the first part is the most exciting as previous efforts at modifying loans have not been very successful. According to one report 58% of loans that were modified are right back in default within six months. Maybe with government subsidies the modifications will be significant enough to really make a difference.
In fact, the goal seems to be to bring the housing payment down to 31% of the borrower's income, which sounds like a good target. Hopefully they will also look at the total debt-to-income ration and not just the house payment. If another 31% of income is going out to car loans and credit cards then you're up to a 62% debt-to-income ratio, which is not sustainable. Unfortunately the people who buy more house than they can afford are often the same ones who overindulge in other credit as well. These are the details that we haven't heard yet and that will determine whether or not this part of the plan is effective.
Many important details are yet to be announced on the first part of the plan as well. They say it will allow people to refinance even if they owe more than 80% of the value of their home. We can already do that right now. The only issue is that you pay Private Mortgage Insurance (PMI) if you borrow more than 80%, and that can often make the refinance less attractive. So will this plan remove the requirement for PMI on high loan-to-value loans? What would the rate be on a mortgage that is 105% of the value of the home? What kind of income, assets and credit would be required? Who will process and underwrite these loans?
Details aside I think it's the right approach. People who's only mistake was buying at the wrong time deserve the help at least as much as those trying to hang on to a house they probably shouldn't have bought in the first place. Also, allowing 4-5 million homeowners to lower their house payments is a great stimulus for the economy. A refi to a lower rate will save the average family a lot more than any tax cut, and all that money will be available to go back into the economy right away.
The basics of the plan and it's goals are great: help struggling homeowners avoid foreclosure, help responsible homeowners impacted by sagging home values, and stimulate the economy at the same time. Hopefully the details and execution of the plan allow it to live up to it's potential.
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