Obama’s Plan: Help for Small Investors

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Yes you read that right. Obama’s plan will also help you refinance if you have rental properties. Last week Fannie Mae and Freddie Mac announced they would refinance rental and second homes as part of the Obama administration’s housing relief effort.  That is a relief! It seems that finally these lending giants have realized that helping small investors will also help renters and if nothing else provide homes for the foreclosed upon.

Here’s the skinny. First, the loans must be owned by Fannie or Freddie. If you don’t know, call your servicer to find out or go to Fannie and Freddie websites. If your loan is with another entity or a private lender, you will not be eligible.

Just as with owner-occupied properties, the loan to value ratio cannot exceed 105% and that is up to $729,750 loan amount.  Let’s say you bought a duplex or a fourplex a few years back for $500,000 with a first mortgage of $400,000 at 7.5% and that loan has now been acquired by Fannie Mae. You may well be able to refinance into todays 5% and 6% rates, thereby greatly increasing your cash flow. Even if the value of your property has dropped in the intervening few years, as long as the current market value is at least $420,000, you can do it.

Of course, you do have to be a good prospect for a refi. Your payment history on the loan should be close to perfect–no 30 day lates in the past 12 months. Even if you’ve had other financial woes which may have tanked your credit score, it’s still possible because Fannie and Freddie have agreed to waive their usual minimum score requirement and you won’t have to pay for new mortgage insurance [pmi].

You will have to show income to qualify–often investment income from the building is enough–and there will be the usual closing costs which will increase your loan balance.

All in all, though, this is a great deal!

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Mortgage Rates To Go To Record Lows!

The Federal Reserve has began purchasing Mortgage-backed Securities from Fannie Mae and Freddie Mac. This has driven mortgage rates to record lows.  The 30-year fixed rate is projected to reach 4.5% by the beginning of 2009.

This could be your chance to take advantage of this unprecedented opportunity.

The U.S. Treasury Dept. is considering a plan proposed by the Financial Services Roundtable, an industry trade group, to purchase mortgage-backed securities from Fannie Mae and Freddie Mac in an attempt to restore confidence in mortgage-backed securities and encourage banks to make additional loans.
Under the plan, the Treasury Dept. would purchase 30-year, fixed-rate mortgages, which should restore confidence in mortgage-backed securities and encourage banks to make more loans.  As a result, banks could lower the rates on mortgage-backed securities, which could lower mortgage rates for consumers.The idea is to restore confidence in mortgage-backed securities, encouraging banks to make more loans, knowing that they will be able to sell them to the federal government. That should lower the rates on mortgage-backed securities and in turn mortgage rates.

Who will benefit from this plan?

The prime beneficiaries and the prime targets are home buyers. The whole idea is to provide low rates to more potential home buyers can qualify for loans.

Of course, California still has some of the highest-priced real estate in the country.  Many loans here go over the limit at which the government entities, Fannie and Freddie,  will purchase loans. Such jumbo loans are those over $729,750 until December 31st and then to $625,500 for 2009. These lower rates will not apply to such non-conforming loans.

Other beneficiaries are those who would like to refinance. Here in California, though, only those who do not owe more than their homes are worth or who, indeed, have significant equity in their homes will be able to take advantage of this boon.

And Now For the Good News

Finally, some relief for California home sellers and home buyers. As part of the federal stimulus package,  conforming loan limits have been raised substantially, up to $729,000 and, to FHA  loan limits are up to the same amount until the end of the year.

Well, hooray for mortgage wonks! We were hoping for something that made sense,  you might say…Here’s what it all means…

 Until now, conforming loan limits,  meaning those conforming to the guidelines issued by Freddie Mac and Fannie Mae and thus saleable on the secondary market, capped at $417,000. Above that limit and buyers had to purchase a so-called jumbo loan with rates at least 1% higher and sometimes far more. That hadn’t bothered us in SoCal much.  Even with our ever-escalating prices, lenders simply packaged a first loan up to $417,000 and offered a smaller second loan to cover the difference.

Then came August 07 and the subprime crisis hits the fan. Foreclosures start to multiply, so lenders revise their guidelines to plug up the gaping holes speculators and the penniless had been running through. The investors who provide the money for the second loans designate SoCal counties as “distressed” and decline to provide any more funds. 

   Jumbo loans cost 1-3% more than conforming, so who is going to take the hit?   With lenders heading for the hills, it’s pretty clear that sellers will have to revise their prices, but even then buyers are declining to participate. The market slows to a snail’s pace, making a bad situation worse.

 Then, our do-nothing Congress, mired in gridlock, wakes up: 2008 is an election year! Miraculously, passing a bi-partisan stimulus package in record time, Congress  makes sure we all receive $300, $600, $1200 or whatever from our tax returns. But, this bill  also helps home owners sell their homes by raising the conforming  rate up to $729,000 in highest priced areas, such as our own.

 What about the buyers? Buyers will have an easier time to qualify with the lower rates, but first-time buyers are getting a break, too. FHA loan limits are $729,000 until the end of the year; that rate expires  right after the election. FHA loans typically have down payments of 3-5% or 103% of the purchase price for repairs, all guaranteed by the Federal Housing Authority [FHA]. FHA made home ownership possible for millions of Americans after World War II. FHA may save us once again.

So, you see this is really good news, not just for wonks but for home sellers and first time buyers.