By Timothy J. DeFeo
What were first thought to be financial ripples running through the real estate industry early last year quickly grew into towering waves that crashed atop mortgage lenders over the past several months. The subprime mortgage fiasco rapidly drove cracks throughout the entire foundation of the lending industry as securitized-debt deflated in value and the market became increasingly reluctant to accept it. The result was an expanding reorientation of the real estate industry for the lenders, the financials, and the market.
President Bush, Congress and the private sector—including the National Association of Realtors®—hurriedly worked to craft a bill that would alleviate the congestion and illiquidity in the housing market. The Economic Stimulus Act, which was passed in mid-February, increased the conforming loan limits for GSEs (Fannie Mae and Freddie Mac), as well as increasing the loan limits of the Federal Housing Administration.
Shepherding for Change
Richard Gaylord, 2008 National Association of Realtors® president and a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., characterized the passage of these new limits as “a remarkable achievement.” NAR was actively involved in shepherding the bill through the legislative process. In fact, Gaylord was particularly impressed by the tremendous support by NAR’s members. “Never before have I experienced such a unified effort on a single issue,” he concluded.
“This new law will do more than jump-start consumer spending—it will give the housing market a big shot in the arm, providing much needed help to homeowners with costly loans and opening the door for potential buyers across the country,” remarked Gaylord, in a recent podcast address.
An NAR study on the nationwide economic impact forecasts substantive results from the loan limit increase. An additional 500,000 refinanced mortgages could prevent 210,000 foreclosures, and more than 300,000 home sales could materialize. The estimate of new buyers entering the market due to the FHA loan limit changes could hit more than 130,000. “These are real results and can have an immediate and sustainable impact for families across our country,” says Gaylord.
In Norfolk County, for example, the FHA loan limits will increase from $362,790 to $523,750; the GSE limits will increase from $417,000 to the new FHA limit. The median price for a single-family property in Norfolk is $419,000, according to the recently released HUD recalculation. The new limits for FHA, Fannie Mae/Freddie Mac are now set at 125 percent of the HUD median prices, with a floor of $271,050 and $417,000, respectively, but not exceeding $729,750. The FHA limit had been set at 95 percent of the median sales price.
“I think around the country it will have a significant impact,” says Doug Azarian, 2007 MAR president and owner of Century 21 Dream Homes in Falmouth on Cape Cod. “In Massachusetts it will provide funding, it will allow for some financing on some units,” he adds. “It will help some people get into properties they wouldn’t have been able to otherwise.”
There will be 250 areas across the country that will earn higher cap numbers, and 70 will be given the highest allowable loan limit of $729,750. The influence of the loan limits will be less significant in areas where buyers have available financial resources. Azarian cited Nantucket, which had its loan limit reach the maximum, as one such market that will not be demonstrably affected by the loan package.
The days of quick and easy real estate sales have gone—at least for the foreseeable future. And that means Realtors® have to work harder, have an even greater understanding of the market, and have a firmer grasp on the mechanics of real estate in order to succeed. One of the areas that Realtors® can have an appreciable advantage in the marketplace is through their financial knowledge and ability to facilitate the financial side of the real estate transaction.
“There are certain segments of the market where it is very important that they know and understand,” these programs, says Azarian. “Some of the programs have increased requirements, they have additional fees attached to them, require performance with regard to debt payments and certain ratios. It is important for agents to understand that, especially if those are the programs that the buyers need to be in,” he adds.
“It certainly doesn’t do consumers, both sellers and buyers, any justice if they get involved in a transaction they cannot execute because a Realtor® was not up to speed with the financing requirements,” warns Azarian.
The FHA and Fannie Mae/Freddie loan limits will quickly work their way through the secondary market and the mortgage products offered by banks. Knowing where those limits now stand will be beneficial, especially for Realtors® in certain markets. But there are also state programs of which Realtors® should be aware.
“I think it is very, very important,” says Pat Tierney, co-owner/broker at Stanton & Tierney Real Estate in Hyde Park, about the importance of having a fundamental understanding of the financing options. “It would help us, we would sell more houses,” she says.
Tierney recalled the real estate market when she began in the early 1980s. At that time, brokers would qualify a client, direct them to a bank, and be responsible for much more of the financing side of the real estate transaction. But over time, the banks became much more active in marketing directly to homebuyers, and buyer-agency came into play. “We stepped back and abdicated that role,” concludes Tierney. The result was what she describes as a “missing link,” which ties the Realtors® more closely to the financial transaction.
Tierney believes Realtors® are still in a position to educate and direct homebuyers to programs the consumer is unlikely to be aware of—since banks primarily push only their own products. Tierney, whose brokerage covers an entry-level market, says, “The majority of Realtors® we deal with are not informed about these programs. The average Realtor® doesn’t feel they have to know it to get the job done.” While the market remained robust the real estate environment wasn’t driving them to learn about the programs. But now may be the time.
“There are three people in the financial transaction, the listing broker, the selling broker and the buyer,” says Tierney. “It is so important if you know about them [financial programs], because you can make it happen—sometimes,” advises Tierney.
“In some cases, Realtors® have created a niche by being familiar with the programs and are able to help people get into homes because of the programs,” explains Azarian. “In many cases they [consumers] are not aware of them.”
Programs to Make Deal
MassHousing is a state housing finance agency with several programs with which Realtors® should be familiar. Begun in 1966, MassHousing is a self-supporting, independent public authority created to increase affordable rental and for-sale housing for low- and moderate-income residents. MassHousing describes itself as “the state’s affordable housing bank.”
The biggest part of their business is making loans to first-time homebuyers, but there are also programs for existing owners and refinancing, in addition to development loans. Since 1970, over $9.9 billion has been invested in the financing of 88,000 apartments and 55,000 home loans. The agency is self-funded through tax-exempt mortgage revenue bonds and makes its loans through a network of over 140 lenders across the state.
MassHousing’s MyCommunity Mortgage is a partnership with Fannie Mae that emulates their MyCommunity program. “It is a great program,” says Tierney. She has seen many deals come to fruition in her market because of the program. Other programs of note include the MassAdvantage First Step, which is a 5-year interest-only mortgage.
Qualifying for a MassHousing program is determined by both income and sales price limits. The state has been divided into 27 markets, and each specific area carries its own limits. The Boston market, for example, has an income limit of $105,100 for a family of three; the single-family house price limit is $428,000. MassHousing provides mortgages with up to 97% (LTV) for one-to-four family residences, as well as condominiums.
One of the great advantages to homebuyers using a MassHousing mortgage is the lower interest rate, which generally falls .25% to .50% below market rate. And the underwriting requirements are more lenient as well; credit scores as low as 620 are acceptable.
MassHousing offers MIPlus on its mortgages, which is a traditional insurance protection policy for lenders, but it also has one other unique element. It offers mortgage payment protection for the first 10 years of the loan. This program provides the principle and interest payments for up to six months for a borrower who becomes unemployed. This is a significant difference from other available mortgage products.
The second phase of the Stimulus package, which is working its way through Congress, will likely contain additional funding for public agencies like MassHousing. According to Peter Milewski, MassHousing's director of the Mortgage Insurance Fund and the agency's manager of Homeownership Business Development, the added funds will allow MassHousing to issue more bonds, which will generate more available funding for mortgages and potentially lower borrowing costs.
Milewski experienced Realtors’ unfamiliarity with housing programs last year when he accompanied his 27-year-old son, a first-time homebuyer, through the shopping process. While Milewski stood back and kept his real estate credentials under wraps, his son took the lead through 15 open houses. His son was clearly a candidate for a MassHousing mortgage. Twelve of the 15 Realtors® recommended deeply discounted ARMs; only one suggested Masshousing programs as a solution.
Tierney stressed the importance of an in-depth understanding of all the financial aspects of real estate with this conclusion: “You get more deals done, and more people get in homes.”