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FHA loosens lending, is history repeating itself?

The FHA just changed the rules to let more subprime borrowers into the market, which sounds a lot like how the housing crash got started that we’re still recovering from.

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Did you know that the Federal Housing Administration (FHA) is loosening lending for subprime borrowers? A new metric they’ve rolled out to assess the performance of FHA-loan originating lenders will do just that.

The move is raising real estate industry eyebrows, and many tell us they’re having dejavu, as the subprime crash was the first major domino in the entire economy’s collapse that we’re still recovering from.

So how does the new measurement work?

Under the new measurement, the FHA intends to take a deeper dive in evaluating loans that eventually default, which could lead to lenders being stripped of their FHA approval. This measure was proposed a year ago to loosen lending, particularly regarding borrowers with credit scores between 580 and 680 which is said to be millions of potential borrowers.

The metric measures the defaults of borrowers in what the FHA calls “three distinct credit bands,” using an adjusted default rate instead of a weighted average. The lender’s percentage of loans in each band are measured against a benchmark rate for seriously delinquent loans in each band.

Previously, an FHA-approved lender could be cut from the program if their default rate went above a certain threshold, but the new measurement loosens that metric. This segment of lenders has long shied away from this segment of the market to avoid risking their FHA approval, but Uncle Sam intends to change that.

Is this the sign of a future housing crash?

For years after the crash, the National Association of Realtors stuck to the drumbeat that lending standards must be loosened, but that talking point has slid out of their press releases and their primary concern has transitioned to housing affordability.

So if the NAR is focused squarely on affordability, does this FHA put a dent in that challenge? Time will tell.

Analyst Charles Payne opined today that this is no more than a move to “curry favor” with voters and buy their votes. Others have opined that this is a long overdue move for an overly restrictive lending environment that has overreacted to the crash.

The bottom line is that while this could help bring back the first time buyer market which shrank after the housing crash, it is reminiscent of Barney Frank’s literal yelling about serving the subprime market which paved the way toward a historic crash that we’re still reeling from.

Time will tell if this lone measure sets the housing market up for another failure, or if it is a simple way to gin up some home sales.

#FHAmetrics

Lani is the Chief Operating Officer at The Real Daily and sister news outlet, The American Genius, and has been named in the Inman 100 Most Influential Real Estate Leaders several times, co-authored a book, co-founded BASHH and Austin Digital Jobs, and is a seasoned business writer and editorialist with a penchant for the irreverent.

Politics

President Trump signs Executive Order on healthcare, calls it “a beginning”

(BUSINESS NEWS) The ink is drying on President Trump’s latest Executive Order, pushing agencies to adjust how existing healthcare laws are implemented.

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President Donald Trump signed an Executive Order Thursday, seeking to bring affordable health insurance to millions of Americans by promoting flexibility, choice, and competition.

The Order assigns the Labor Department to consider how to allow groups (small businesses, possibly individuals) to buy Association plans across state lines, consider expanding coverage through short-term low-cost plans, and to consider changes to employee reimbursement accounts.

House Minority leader, Nancy Pelosi said prior to the signing of the Order that “it is a sabotage of the Affordable Care Act, and quite frankly, a real disservice to the American people.”

Pelosi opined that President Trump “knows very little about healthcare legislation.”

Supporters have long pushed for health insurance to be competitive by opening the market across state lines and using the power of numbers to buy insurance like a trade Association.

Critics have long said an Order of this type will increase premiums as the risk pool adjusts up, filled mostly with people buying insurance that have pre-existing conditions. They also say that premiums may be lower under this Order, but benefits may be reduced.

Neither side has a universal solution all can agree upon, but this Order certainly marks the first steps in President Trump making good on his campaign promise to dismantle Obamacare.

The administration cites that it could take over six months to take effect. Congress has already given up on the notion of repeal/replace of Obamacare in 2017, and while President Trump can’t repeal the Act himself, today’s Order proves he is willing to push his administration to update guidance and expand how the law is implemented.

How the agencies will adjust to change the current regulations as ordered by the President will become clear over time, stay tuned.

National Association of Realtors President, William E Brown tells The Real Daily, “Today’s White House announcement is an important part of the work to expand health coverage opportunities. Association Health Plans have long offered promise for small business owners and self-employed individuals seeking affordable health coverage.”

Brown concludes that they are “reviewing the specifics of the proposal to determine the promise that it may offer self-employed individuals, like real estate professionals.”

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Politics

FHA Commissioner named, now all he needs is a yes from the Senate

(POLITICS) President Trump has confirmed his choice for the new commissioner of the FHA, all that is left is for Senate to approve.

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Confirmation, finally

Confirming rumors that began in May, President Trump this Wednesday announced his nomination of Brian Montgomery for Federal Housing Administration (FHA) commissioner.

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Montgomery will replace acting commissioner Edward Golding.

Commissioner round two

If the Senate approves his nomination, Montgomery will serve for the second time as FHA commissioner. He held the post for eight years under former president George W. Bush, and for about six months after Obama’s inauguration before resigning in July 2009.

Currently, Montgomery serves as Vice Chairman for an advisory firm he founded – The Collingwood Group, based in Washington D.C.

In his previous tenure as FHA commissioner, Montgomery created a bill, passed in July 2006, which significantly modernized the FHA, and also worked to assist black families trying to purchase a home for the first time. For his leadership in the cause of affordable housing, in 2008 he was awarded the Robert J. Corletta Award.

In a statement issued by the White House, Montgomery was praised for his leadership during his previous term as commissioner. The statement acknowledged Montgomery’s “efforts to preserve… affordable rental housing,” as well as his successes in “reducing rental assistance costs and the costs of FHA insurance claims,” and in financing the development of “more than 300,000 rental units.”

Work to do

If his nomination is confirmed, as FHA commissioner, Montgomery will need to address the suspension of the proposed mortgage insurance rate cut that Trump imposed shortly after taking office in January.

Last November, Montgomery told Politico that in order “To restore housing to its traditional role as an engine of economic growth and opportunity, the incoming Trump administration should pursue policies designed to make the path to homeownership possible again for fully-informed prospective buyers who have the ability to carry a mortgage.”

Pick up the pace

Business leaders and realtor are calling for the Senate to confirm the nomination as soon as possible. National Association of Realtors President William E. Brown wrote, “FHA’s mission is critical to the business of our members. Having strong leadership at the helm means fresh opportunities to improve the FHA programs that put homeownership in reach for millions of Americans every year. We congratulate Brian on the nomination and hope to see him swiftly confirmed.”

#ComishMontgomery

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Politics

Mnuchin might be capping your Mortgage Interest Deductions

(POLITICS) With so much effort being put forth to encourage homeownership, it seems ridiculous that the government is looking to cap mortgage policies designed as incentive for ownership.

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Favorite homebuyer tax cut could be in danger

Potential homebuyers, especially first time homebuyers are always looking for the maximum amount of discounts and price breaks to make their dream homes more affordable. One of the most popular ways to do this is by utilizing the government tax breaks for first time (and often repeat) homebuyers on their mortgage.

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The Mortgage Interest Deduction (MID) is one of the most effective ways to make homes that are marginally out of a buyer’s price range, a bit more affordable. MID allows homeowners to write off the interest they pay on their home loans when filing their income taxes. This is a lifesaver for most homeowners’ budgets. However, as the tax reform season kicks in, it looks as though the MID may be on the chopping block (or at least the shaving block).

MID may be trimmed/reformed

According to CNBC, one source, who wished to remain anonymous, stated, “saying they [tax reformers] aren’t going to get rid of it [the MID] isn’t saying they won’t touch it. There are clearly discussions going on around reducing the maximum of the mortgage interest deduction to the $600,000 range.” While this may not seem like much of a reduction at first glance, consider that the current maximum is $1,000,000 for married couples filing jointly and $500,000 for single homeowners. Also, as CNBC reports, the median home price point is approximately $200,000.

By lowering the MID to the $600,000 range, not all individuals are going to meet this cap, but they may well be discouraging some other individuals from purchasing a home.

In May, Treasury Secretary, Steven Mnuchin stated that President Trump’s tax-reform plan would not eliminate the MID, however, this is again not to say it’s safe from reform. The MID has been the subject of modification/reduction/reform talks before, but it seems as though it has become an even more pressing concern as of late.

Discouraging homeownership

The more worrying aspect of this is that the MID has long been considered “safe” or “untouchable” by tax reformists, until now. By reforming, and potentially lowering the cap to $600,000, this measure could be used as a bargaining chip to change more “safe” deductions. Many real estate industry SPECIALISTS, also worry that this measure will not only open the floodgates for additional reform, but also that it will be an unwanted stepping stone to discouraging more potential homebuyers from making the leap into homeownership.

According to Doug Yearly, CEO of Toll Brothers (via CNBC), “making changes to the MID would be very bad policy.” He goes on to state,” this country has prided itself on encouraging homeownership, and MID has been around for decades. It’s worked very well.”

Nay to mortgage deduction changes

The National Association of Realtors will lobby hard against these changes, but it is unclear at this time whether or not these measures will go through, or if they’ll be aborted during tax-reform discussions.

Either way, this is definitely something to keep a watchful on, as reduction or elimination could be detrimental.

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