Two years ago, the National Association of Realtors, the largest trade group in the nation with 1 million members, floated its idea of a housing solution to attendees at its annual convention.
NAR later presented Congress with a Four-Point Housing Stimulus Plan to help stabilize the housing and mortgage markets. The crux of the package suggested using $130 billion of the $700 federal billion bailout funds on housing, specifically earmarked for an interest-rate buydown and more tax credits.
That buydown idea did not happen. It would have been a one-percentage-point, interest-rate buydown on fixed-rate loans for all buyers. The reduction reportedly would have resulted in approximately 840,000 additional home sales and reduced the inventory of homes by as much as 20 percent.
What was adopted was an $8,000 first-time homebuyer tax credit and a new existing homeowner tax credit of $6,500. The first-time bonus was especially popular, even extended for an additional period.
This year, NAR crafted a five-point proposal, New Solutions for America’s Housing Crisis, that really does not contain any new ideas at all, rather a restoration of old guidelines and programs.
While each "point" contains about five subtitles that could easily stand alone, the proposal focuses on higher lending limits, no reductions in the mortgage interest deduction, reinstatement of the FHA 203(k) program for investors, and relaxed mortgage guidelines for second homes.
The investor message came through loud and clear, particularly because Florida credits its rebound to investors and international second-home buyers. According to Moe Veissi, NAR president-elect, a 10-year supply of condominiums has been reduced to seven months due to cash transactions by investors looking to hold the properties for long-term rentals.
"Investors are not healthy to the market during bubble years, but they can help speed up the recovery in a down market," said Lawrence Yun, NAR’s chief economist.
Owner-occupants continue to use popular 203(k) loans, which allow the borrower to finance both the purchase of the property and upgrades into one mortgage guaranteed by the government.
However, for the past 15 years, FHA has maintained a moratorium on allowing investors to use the 203(k) program because of past abuses in how the refurbished properties were appraised.
Most mortgage loans provide only permanent financing. Typically, the lender will not close the loan and release the money unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, the lender usually requires improvements to be finished before a long-term mortgage is granted.
When a buyer wants to purchase a house that needs repair or updating, the buyer usually has to obtain interim financing to purchase the dwelling, then additional financing to do the work. When the rehab is completed, a permanent mortgage — which pays off the interim loans — is made.
(Interim financing often involves relatively high interest rates and relatively short payback periods.)
The FHA 203(k) program was designed to roll all financing into one package. The borrower can take out one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. The mortgage amount is based on the "as will be" (projected) value of the property and takes into account the cost of the work.
FHA 203(k) loans are available for purchase or refinance. The refinance component can combine all existing loans plus provide the funds for needed repairs.
To minimize risk to the mortgage lender, the loan is eligible for endorsement by FHA as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At that point, the lender has a fully insured mortgage.
The FHA 203(k) loan can come in handy in a foreclosure sale — and especially to investors around the country. In many cases, the previous owner has taken fixtures or the structure is in dire need of repair. Loan proceeds would provide for the updates and the permanent financing.
It’s time to let investors back under the FHA 203(k) umbrella. It’s past time to get vacant homes cleaned up and alive again with occupants.