Bittersweet Bill
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The so-called housing “rescue” bill, passed by Congress and awaiting the President’s signature, delivered a pounding to the housing industry in the first few days after its provisions became clear. Public builder stocks fell by more than 15 percent upon news that the bill would eliminate as of Oct. 1 of this year the down-payment assistance programs widely used by builders.
Moreover, lawmakers immediately hedged their bets on the impact that the bill would have on the market. Sen. Christopher Dodd (D-Conn.), a chief architect of the bill, noted that its modest relief for at most 400,000 households at risk of foreclosure would merely slow a rising tide of foreclosures. He said that one in eight homes is expected to enter foreclosure over the next five years.
The elimination of down-payment assistance—which has been used extensively by builders to lower down payments on FHA-insured loans to zero—could eliminate from the market as much as 10 percent of potential buyers, according to some reports. It may also cause cancellations in coming months among buyers who were depending on the assistance for their down payments.
Currently, under the down-payment assistance programs run by nonprofit groups such as Nehemiah Corp. and AmeriDream, third parties may provide the money for the required 3 percent down payment on FHA-insured mortgages. These third parties may be family members, friends, charitable organizations, or sellers such as home builders. The use of these programs picked up speed this year as FHA financing grew in popularity.
Though the new $7,500 tax “credit” for first-time home buyers—it has to be paid back, interest-free, over 15 years--is likely to result in sales, continued pressure from foreclosures will surely continue pushing down prices for new and existing homes. The S&P/Case-Shiller index of existing home prices released today showed that prices have declined 15.6 percent year-over-year through May in 20 cities around the country. Most analysts and economists expect home prices to continue sinking for at least another year.
If people want to use the credit to buy a newly home, they need to act fast, especially if it will take six months or more to build their house. To qualify, they would have to close escrow on a house by July 1, 2009. The credit is more likely to be used to buy currently available homes, whether they are foreclosed properties or new inventory homes. On a $200,000 FHA-insured mortgage, the $7,500 credit comes out to a little bit more than the $6,000 buyers would need for a down payment. It seems as though Congress made a trade.
In passing the bill, most legislators bought into the notion that it was a necessary precaution against a collapse of the housing finance system. The legislation includes a provision that allows the Treasury Department to grant an unlimited line of credit to Fannie Mae and Freddie Mac. These two entities, which some quarters argue are on jittery financial ground, hold or guarantee more than 40 percent of the mortgages in the country.
The bill includes several other provisions that could help prop the housing market. It gives state and local governments an additional $11 billion in authority to issue tax-exempt bonds. Those resulting funds can be used to write mortgages for first-time home buyers and finance construction of affordable housing. And it creates a new, higher cap for FHA-insured mortgages in high-cost areas such as Washington, D.C., and Southern California--$625,000 after a higher, but temporary, limit expires at the end of the year.
While the bill will provide some stability to the battered home building market, it inflicted some immediate pain as it moved through the House and Senate last week. Public builder stocks lost 12 percent of their value on Friday and fell by another 5 percent yesterday. This happened after Michael Rehaut, the home building analyst for J.P. Morgan, released a report on Thursday estimating that DPA programs provide down payments for roughly 17 percent of new home sales. “The elimination of these programs could severely reduce mortgage financing options for these buyers and result in the likely removal of a material portion of these buyers from the market altogether,” he wrote.
The use of down-payment assistance program varies by builder and region. Lennar Corp., for instance, recently reported that one third of the mortgages it originated in the last year used the program. Pulte Homes, on the other hand, indicated last week that the program accounted for 10 percent of its loans in the second quarter. The program is much more prevalent in low-cost home building markets, such as Atlanta and Texas. It’s also heavily used by entry-level builders in former high-growth markets such as Las Vegas, Phoenix, and Southern California.
All told the bill is likely to have a beneficial impact on the housing industry, notwithstanding the short-term pain it inflicted. How much of a beneficial impact is anyone’s guess.
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