Housing Bill Adds Second Lien Amendment; DAPs to Be Eliminated

The house just passed it's $300 billion plus(that the minimum) housing bill today, with the Senate getting ready to pass on to a President Bush who will sign the bill. Here's some of the hightlights:

The Act would authorize the FHA to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; the lender must, however, first write-down principal loan balances to 90 percent of current appraisal value.

It’s a proposition that in many cases would mean wiping out second lien holders, leading more than a few market participants to suggest recently that lenders would be unlikely to participate voluntarily — or, at the very least, that first lien holders would be held hostage by second lien holders.

This could get nasty as these banks are going to be fighting each other. The National City folks have to be shaking right now.

The House bill also adopts language from the Senate version of the package that would ban so-called seller-funded down-payment assistance programs; this was a hotly-contested area of difference when the Senate volleyed its version of the bill back to the House.

“We’re going to yield to the Senate on that,” House Financial Services Committee Chairman Barney Frank (D-MA) is quoted as saying in the Washington Post. “There are a lot of trade-offs in the bill.”

Seller-funded downpayment assistance allows property sellers, including largely home builders, to donate funds to a non-profit agency, which then “gifts” the funds to a borrower as a down payment on a new home. The non-profits make a tidy processing fee, while critics — and even government agencies such as the IRS — have for years blasted the practice as a legalized scam.

“These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller,” noted Felix Salmon in his highly-read economics blog at Portfolio.com. “I’m sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of [DAP programs].”

Here is a 10% drop in prices I did not originally count on. A lot of new homes were bought this way with home builders giving money to buyers through these non-profits. The IRS called it a scam and hated it. A lot of homes in the city basically lived on this type of assistance that realtors are going to have to go to sellers and basically explain the gig is up. Add that on top of the 10% write off and well if you bought before 2002 your probably ok but don't expect a windfall as we maybe heading for 2001 prices at this point when we bottom in 2 years.