More on the FHA monetizing the tax credit...

Apparently you can use the tax credit for downpayment...

The new program lets home buyers apply the tax-credit advance against the FHA's 3.5% down payment requirement only if the loan is handled through a state housing-finance agency; otherwise the tax advance may only be used to cover closing costs, to increase the down payment, or to buy down the mortgage's interest rate. The FHA already allows down payment assistance from family, employers, and governmental agencies, but generally bars it from sellers, mortgage writers, or others who would benefit financially from the transaction.

How will this affect FHA defaults? Businessweek has this tidbit (emphasis added):

First, the source of a downpayment can make a big difference. For FHA-backed mortgages made in fiscal 2000, the foreclosure rate was 5.95% when homebuyers made the downpayment -- but 7.9% when it came from the buyer's family and 15% when it came, indirectly, from the seller in a practice that is now banned. When downpayment assistance came from a government agency -- eg, a state housing finance agency -- the default rate was 13.1%, more than double the rate when homebuyers coughed up the downpayment themselves.

Unlike normal times where government agencies have a limited budget which means few would be able to qualify (limiting the damage).. the funding here basically comes from the borrower and so there are no budgetary restrictions. This means that the monetization of the tax credit will have a much greater impact than I previously thought. If you thought inventory was low on the low end before just wait until this program is fully implemented. Buyers will be able to have zero down and have the sellers pay closing costs... Nothing like impulse buying a house. Clearly we have learned nothing from the housing bubble.

Mark Zandi: "There was a regulatory failure, and taxpayers have a fiduciary responsibility to make it right"

Mark Zandi thinks we haven't gone far enough bailing out homeowners (emphasis mine)...

The administration and Congress should therefore prepare a plan B. And it must be simple: For example, anyone who got a mortgage from 2005 to 2008 on a home they live in that was inherently unaffordable at origination - their debt-to-income ratio exceeded 31% or the loan was more than 90% of the home's value - qualifies for a loan modification that reduces the principal to the current appraised value of the home. Taxpayers would bear the cost of the principal reductions, appraisals, income verification and other paperwork.

This straightforward approach benefits everyone involved. Since the eligibility criteria are clearly defined, homeowners would not be able to default on purpose to get the modification. And it is fair: If the loan was inherently unaffordable at origination, regulators should never have allowed it in the first place. There was a regulatory failure, and taxpayers have a fiduciary responsibility to make it right. Besides, taxpayers will also benefit as the foreclosure crisis abates, because house prices will stop declining, and that will end the drain on the financial system and broader economy.

I wonder if Mark realizes that pretty much every FHA loan would be eligible for his loan modificaiton.. even ones originated today. I think the failure was at every level regulatory, personal responsibility, fiduciary duty, etc. To single one area out and make that area wholly responsible for the whole mess is a tremendous leap in logic. Each area is shouldering some of the burden.

On the loan modification plan Mark Zand I agree.. it makes little sense for homeowners to get the loan modification as they are currently structured. Most homeowners would be better off starting fresh and repairing their personal balance sheets then sinking money down the black hole that they've been putting money into all these years:

The plan is also guilty of kicking the can down the road. The lower monthly mortgage payments under the plan last for only five years, and for many homeowners deeply under water, it makes no sense to keep paying on their mortgages no matter how affordable the payment is. Why spend $5,000 fixing your roof if you are already under water by $20,000? That's why many of these homeowners will ultimately land back in foreclosure.

100% financing is back...

The FHA is set to announce that the first time homebuyer tax credit will be allowed to be used as a down payment for FHA loans. This effectively creates 100% financing for homes under $230,000 and significantly lowers the barrier of entry for homes above that price.

From HUD Secretary Donovan's speech:

"And we are taking action to further help the housing market recover. I'm excited to announce here at NAR that FHA's policy on the "monetization" of the first-time homebuyer tax credit will soon be published. I know that you've been waiting anxiously to hear FHA's position on the matter. We, like you, believe that this new tax credit is not only a tremendous opportunity for first-time homebuyers, but also an enormous benefit for communities struggling to deal with an oversupply of housing. According to estimates by the National Association of Home Builders, this new tax credit will stimulate 160,000 home sales across the nation - 101,000 of which will be first time buyers who will receive the credit. Another 59,000 existing homeowners will be able to buy another home because a first time buyer purchased their home.

We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a downpayment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to "monetize" the tax credit through short-term bridge loans. We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit. FHA will be publishing the details shortly."

Isn't this how we got into this mess to begin with? Allowing people with no skin in the game to get into the game? Expect inventory to decrease even further.

Bill in California Budget adds 90 more days to the foreclosure process

California Foreclosure Prevention Act:

Existing law requires that, upon a breach of the obligation of a mortgage or transfer of an interest in property, the trustee, mortgagee, or beneficiary record a notice of default in the office of the county recorder where the mortgaged or trust property is situated and mail the notice of default to the mortgagor or trustor. Existing law provides that, after not less than 3 months after the filing of the notice of default, the parties described above may give notice of sale, stating the time and place of the sale, as specified.

This bill, until January 1, 2011, and only with respect to specified loans that were recorded between January 1, 2003, to January 1, 2008, would prohibit a mortgagee, trustee, or other person authorized to take sale from giving a notice of sale for an additional 90 days if the loan at issue is the first mortgage or deed of trust that the property secures, the borrower occupied the property as his or her principal residence at the time the loan became delinquent, and the notice of default has been filed. The bill would exempt certain loans from this prohibition, including, upon order of the Commissioner of Corporations, the Commissioner of Financial Institutions, or the Real Estate Commissioner, as applicable, the loans of a mortgage loan servicer, as defined, if the mortgage loan servicer applies to the commissioner for an exemption indicating that it has implemented a loan modification program with specified features and the commissioner concludes that the program meets specified requirements. The bill would permit a mortgage loan servicer to submit a revised application if its application is denied, and would permit the commissioner to revoke an exemption under certain circumstances. The bill would require the commissioners to adopt regulations in this regard, as specified. The bill would require the Secretary of Business, Transportation and Housing to report to the Legislature 3 months after the first exemption is granted regarding the details of the actions on exemption of loans serviced by a mortgage loan servicer under a loan modification program and to submit subsequent reports every 6 months thereafter. The bill would require the secretary to post specified information on the exemption program on the agency's Internet Web site
...

So unless a servicers offers loan modifications they will be hit with a 180 day waiting period after filing a NOD instead of a 90 day waiting period. As REO inventory gets whittled down sales will freeze up because there isn't enough inventory in the affordable ranges. People want to buy homes but can't afford them, making sure there are fewer affordable homes are out there doesn't seem like a good way of helping the housing market recover.