Word is out.  HUD is lifting it’s prohibiting against buyers using FHA loans to buy a property recently “flipped” by an investor.  This should be great news, and I fielded a number of phone calls over the weekend from clients and agents rejoicing (way prematurely) in the change.

But not so fast on….

Although HUD has indicated a change in their guidelines, they only insure FHA loans.  Some investor still has to buy them.  So what about those investors; are they on board? I put an email out over the weekend to find out and also talked today with a mortgage banking insider.  As I suspected, the “investors” are not buying, HUD guarantee or not.

This sentiment is the same one that has caused investors to apply HUD’s anti-flip rule to conventional and VA loans, even though Fannie, Freddie, and VA have no such prohibition.  Statistically, there is still a very level of mortgage fraud associated with flipped properties.  Without a large pool of investors for mortgages securities (remember the U.S. government is still nearly the only buyer), there is no tolerance for anything risky.

This could change, so of course I’ll be keeping an ear to the rail for any good news.  Stayed tuned.  While it’s a shame that capital cannot make its way to the market of distressed homes (individual investors could certainly fulfill a competitive market function by buying, fixing, and selling damaged properties), it is the lack of market demand itself that is inhibiting the process.

In keeping with a general tightening of it’s lending rules to compensate for elevated default rates, HUD has announced an increase in the “up-front” mortgage insurance (MI) for FHA loans from 1.75% to 2.25%. As you know, mortgage insurance on FHA loans is normal split into two parts.  One portion is added to the monthly payment, and the other is added to the loan amount.  Allowing buyers to finance a portion of the MI has the effect of keeping payments lower than they otherwise would be on a similar conventional loan.

While the increase has some people concerned, let’s take a second and put things in perspective.  On a $200,000 loan, the financed portion of the MI increases from $3378 to $4343, so your loan balance grows by less than $1,000.  The resulting increase in the monthly payment (I’m using a 5% interest rate) is less than $5.

However, if you’re buying up to the $417k limit and the payment increase is critical, then you’ll want to be in Contract on a home by April 4, 2010, and make sure your lender has pulled your FHA case number before April 5th when the new rule goes into effect.

We in the “biz” have been wrestling for most of 2009 with the product of the Home Valuation Code of Conduct (HVCC), Andrew Cuomo’s settlement with Fannie Mae and Freddie Mac.  That settlement produced a new middle-man in the home appraisal process–the Appraisal Management Companies (AMCs)–that resemble nothing so much as the ‘managed care’ companies that were inserted into the health insurance system two decades or so ago.

And just like that mess, the AMCs have failed to improve things for the consumer.  In fact, it can be convincingly argued that they have made things far worse.  The new protocol has consistently produced poor quality appraisals performed often by the least qualified and frequently out-of-the area appraisers, at dramatically increased costs to the consumer.  But in terms of creating new profits for banks who have now created their own internal AMCs, it’s been a resounding success.

Until now, this new process impacted only conventional loans.  Since most of the market activity has required FHA financing, this hasn’t been as debilitating as it might have otherwise been.  However as of January 1, 2010, it applies to FHA loans as well.  What does this mean for you?

It means that on FHA loans, your lender will now have:

• no control over scheduling of the appraisal
• no ability to communicate directly with the appraiser
• no ability to receive notification from the appraiser when there is a value or repair issue
• severely constrained ability to dispute bad appraisals
• higher appraisal costs
• slower appraisal turn around times
• longer escrows

The best thing you can do in the short-term is to plan for longer escrow periods.  I recognize that short-sale banks are not very cooperative on this issue.  But if you don’t attempt to educate them and plan in advance, you’ll be begging for extensions on the other end.  In the long-run, let your voice be heard and contact your congressperson and let them know what you think.

For awhile, circumstances have existed where the application of the First Time Buyer Tax Credit is unclear.  For example, what about when a couple buy a home and one is a first time buyer and the other is not?   Or, what about when a parent co-borrowers with a child and the parent already owns a home?   Does the person who is buying for the first time qualify?  Do they qualify for the whole credit or only their half?

There is finally some clarification:

IRS Sets New Rules for Tax Credit
The IRS has spelled out guidelines for eligibility for the home buyer credit when co-borrowers purchase a property.

When a home-owning parent of an adult child co-signs for a mortgage and both names appear on the note, the IRS says that under some circumstances, the first-time home buyer can qualify for the whole amount.

The IRS says the parent doesn’t qualify for any portion of the credit, but if the child hasn’t owned a home during the three years preceding the current purchase and can qualify based on income, he or she can be allocated the entire $8,000 credit.

When unmarried individuals co-purchase a home and only one of them is eligible for the credit, then the full $8,000 can be allocated to the eligible buyer.

Source: Washington Post Writers Group, Kenneth R. Harney (12/04/2009)

Here’s an informative video on this topic. Watch the Chief Economist of NAHB answer frequently asked questions about both the First Time and the Repeat Buyer  tax credits.

One piece of the Worker Homeownership, and Business Assistance Act of 2009 just signed into law last week by President Obama, was the expansion of the First Time Buyer Tax Credit to include move up and repeat buyers.  The new Move-Up/Repeat Home Buyer Tax Credit gives qualified homeowners a tax credit of up to $6500, and it is effective as of November 6, 2009.  Like the First Time Home Buyer Tax Credit, you must enter into contract before April 30, 2010 and close by June 30, 2010.   Click the link to check out qualifying details.

A note about getting the cash: while the law allows home buyers to “monetize” the tax credit to help with cash to close, this requires that banks be willing to make short term loans secured by a buyer’s future tax credit.  For reasons you can imagine, banks are not rushing to be the first in line to do this.  I don’t expect to see this happen any time soon.

That said, there are two things you can do to speed up receipt of that money.  First, after you buy, you can amend your 2008 returns and claim the credit as though you bought the home last year.  This may also help those lucky folks whose income in 2009 disqualifies them but who would qualify for the credit based on their 2008 income.  Second, prospective buyers can adjust their withholding in advance to save for a down payment.  Of course, you might have to pay that back later if you don’t buy a home, so only do this if you are really committed to buying.

Mortgage rates should improve a bit this morning on news that October job losses of 190,000 were higher than analysts expected.  Unemployment topped 10% for the first time in a long time.  The see-saw continues.  Is the economy healing or isn’t it?

The Fed continues to be the primary buyer of mortgage backed securities (MBS), though their purchases declined by $2b to $16b last week.  Year to date they’ve bought $993 b!  Hopefully the Chinese, Japanese, and the petro-states will get back in the game before the Fed runs out of money or stops buying next April as indicated. For those who don’t know this, banks who make home loans sell those loans in the “secondary market” to recoup their cash and make more loans.  Until the credit crisis, foreign investors with fistfulls of US dollars from all our purchases of their stuff (oil, cars, cheap toys, electronics) bought US Treasuries or MBS as a way to park those dollars somewhere safe and avoid the exchange rate risk.

Finally, the First Time Buyer Tax Credit passed in Congress and heads to Obama’s desk.  A lesser known piece is that also eligible are homeowners who have owned for at least five years.  They get $6500. Of course there are phase-outs rules and restrictions on property types.  You have to have Purchase Contract by April 30, 2010 and close by June 30, 2010 in order to qualify.  Call for details…