FHA Home Loans and the Housing Recovery Act

You can't turn on the TV these days without seeing a news story about the U.S. economy in general and the housing market in particular.

Starting in 2007, we began to see record numbers of home foreclosures, a trend that continued into 2008 and shows no sign of slowing. But for many homeowners, help is on the horizon. And it comes in the form of FHA refinance loans.

Housing and Economic Recovery Act

The recently passed Housing and Economic Recovery Act of 2008 will help "at least 400,000 families" who are struggling with their mortgage payments and facing foreclosure. It will do this by providing FHA-insured refinance loans to switch the homeowners from high-interest ARM loans to fixed-rate mortgages with lower rates. For those accepted into the program, the end result will be a lower monthly payment and more desirable fixed rate that will no longer adjust / increase.

History of the FHA

The Federal Housing Administration was created in 1934, during the Great Depression, to make home financing available to a greater number of Americans. The FHA does not actually make home loans to consumers. Instead, they insure certain loans made by private lending institutions.

You've probably heard the term "government-backed financing" before. The FHA loan program is an example of this. By having government insurance in their favor, private lenders are more willing to offer mortgages to borrowers they normally wouldn't qualify (due to credit problems or other qualification issues). The lender is assured of getting their money back on the loan, even if the homeowner defaults and stops making payments. That's what the FHA insurance does.

The Refinancing Angle

Traditionally, the FHA loan program was focused on helping buyers in the purchase of a home. But as a result of the aforementioned Housing and Economic Recovery Act, the program is being opened up to homeowners who want to refinance. According to the HUD website, "an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages." The program is slated to begin in October of 2008.

To find out if you are eligible, visit the HUD website or refer to this article. You have to go through an FHA-approved lender to apply for the FHA refinance loan. (Remember, the FHA does not actually offer the mortgage refinance loans. They only insure the loans made by private lenders.)

Getting Away from ARM Loans

The goal of this new program is two-fold. It is designed to help struggling homeowners who have adjustable-rate mortgages (ARMs) convert to fixed-rate mortgages. It's also designed to lower their mortgage rates in the process. While the ARM is not inherently evil -- and can even be a good thing if used wisely -- it has played a big role in the subprime mortgage crisis. This program is designed to give homeowners a way out of their ARM loans by refinancing to fixed-rate loans. At the same time, many people will lower their monthly interest rates. Lower rates and less uncertainty -- a double win.

What's the Catch?

Sadly, the federal government rarely passes legislation designed to help American citizens without putting something into it for their corporate friends. Such is the case here. We recently blogged about the status of Freddie Mac and Fannie Mae and how the government plans to bail them out. Well, the bailout is essentially written into this act as well. Pretty slick, huh?

One thing is certain -- our economy cannot handle foreclosures at the rate they've been happening lately. So the Housing and Economic Recovery Act could be a great thing. Only time will tell.

How to Buy a House With Bad Credit

If you are reading this blog post, I'll assume it's because you are researching how to buy a house with bad a credit score. You're in luck. Because I happen to have a secret formula for buying a home with bad credit.

In truth, I probably shouldn't be revealing this secret. Once the word gets out, the blog will be flooded with visitors, and my email inbox will burst at the seams. Oh well. I'm going to let the cat out of the bag anyway, consequences be damned. Here it goes.

How to buy a house with bad credit ...

Don't Do It!

There you have it. The best way to purchase a home with a bad credit score. Avoid it altogether. It's one of the worst things you could do in the current economy. Chances are, you won't even be able to pull it off. If you've been watching the news or following this blog recently, you'll know that buyers need higher credit scores today in order to quality for a mortgage loan.

Even if you get a loan with a bad credit score, you are going to pay a ridiculously high interest rate for the "privilege." Lenders will take full advantage of your inability to get a loan through most channels. So the one lender out of ten that actually offers you a loan will tack on an extremely high interest rate, which is going to jack up your mortgage payment even more.

This is the kind of scenario that leads to continued financial hardship down the road. It's why we have record numbers of home foreclosures right now. In the past -- before the mortgage meltdown and subsequent credit crunch -- it was a lot easier to buy a house with a bad credit score. In fact, there was an entire segment of lenders who catered to such buyers. But subprime lenders are now practically extinct, as well they should be.

There is one situation where it makes sense to buy a house with a bad credit score, and that's if you can pay for the home outright (without taking out a mortgage loan). In such rare cases, the credit score doesn't matter because the buyer can pay cash. On top of that, homeownership will help them improve their credit score, so it's a double win. But most people with bad credit are not in a position to buy a house out of pocket, so this scenario is rare.

In most scenarios, it's best for a person with bad credit to focus on improving his or her FICO score first ... before trying to buy a home. This statement has always been true, but it's even more applicable today in light of tougher lending standards.

Some people like to put a rosy, unrealistic spin on this topic. These people like to say that everyone should be able to buy a house regardless of their credit situation or financial status. My response to these people is, "Are you crazy?"

Sorry to be so blunt, but I'm a realist. And I think you deserve the truth. I think it's time to doff the rose-colored glasses and look at our economy in the harsh light of reality.

If you have bad credit there's no need to despair. You simply need to patient but persistent, and focus on improving your score first. Once you do that, you'll be in a much better position to buy a house. You'll have an easier time getting qualified. You'll have more loan options. You'll get a better rate on the loan. And you'll be less likely to become another foreclosure statistic.

Fannie Mae and Freddie Mac - Who Needs Them?

Why do we need Fannie Mae and Freddie Mac in the first place? And why have they been in the news so much lately? In this writer's opinion, both organizations should be left alone to sink or swim of their own accord. But I'll try to remain objective as we investigate the world of Fannie and Freddie ...

Who the Heck Are Fannie and Freddie?

While they may sound like the distant aunt and uncle you never knew you had, Fannie Mae and Freddie Mac are actually big corporations. They are also big players in the secondary mortgage market. In fact, Fannie Mae essentially created the secondary mortgage market. So let's start with "her."

Fannie Mae is Born

Fannie Mae (formally the Federal National Mortgage Corporation, or FNMA) was created by a congressional mandate back in 1938. That's right, history buffs ... at the tail end of the Great Depression. Fannie Mae was — and sort of still is — a program designed to extend home loans to a greater number of Americans by (A) providing federal funding to banks and (B) creating a secondary market where mortgage loans could be sold off to investors.

During and after the Depression, the U.S. housing market essentially collapsed. As a result, mortgage lenders became stricter with their lending practices, only offering loans to the best qualified of applicants. Does this sound familiar? But when Fannie Mae came onto the scene, lenders were able to offer mortgage loans to people who would never have qualified before.

For about the first 30 years of its existence, Fannie Mae was a federal institution with no competition whatsoever. It had basically created the secondary mortgage market, so there were no other institutions to compete with it in that arena.

In 1968, Lyndon B. Johnson privatized Fannie Mae to get it off the "government books." So now you had a private company that received federal support and monopolized a certain area of the American economy. Oops. Well, Americans historically do not like monopolies (unless you're part of the monopoly), so the federal government created Freddie Mac to perform the same basic function as Fannie Mae ... thus preventing the monopoly.

If you think this is a little bizarre, you're not alone. In a sense, Fannie Mae and Freddie Mac are like two government-created Frankenstein's monsters. We created the first monster, but it got too powerful. So we did the only logical thing — we created another monster to compete with the first. The Bride of Frankenstein revisited.

And Freddie Mac Too

The "Freddie" of this equation is the Federal Home Loan Mortgage Corporation (FHLMC), which for some reason is called Freddie Mac for short. So what does this bloated organization with questionable accounting practices do? Basically, they do the same thing as Fannie Mae (see notes about monopoly and Frankenstein above).

Today, Fannie and Freddie both buy mortgages from lending institutions, "package" those mortgages with other financial products, and then sell them to investors throughout the world, from Europe to Asia and most points in between.

What's the purpose of this, you ask? Good question!

As touched on above, the purpose behind Freddie Mac and Fannie Mae is to extend homeownership to more Americans. You see, if Freddie and Fannie weren't there to purchase mortgage loans from lending institutions, there wouldn't be much of a secondary mortgage market. In that case, mortgage lenders would be a lot stricter about who they gave money to.

So without Freddie and Fannie, a person with bad credit and a shaky financial history would be turned away by mortgage lenders. No house for you today. Sorry. Better go play the lottery. But with Freddie Mac and Fannie Mae, mortgage lenders can offer loans to a wider range of people, even the ones they deem a credit risk. That's because they know there's a good chance they can sell off the loan to Freddie Mac.

Obviously, this liberates the mortgage lender from any concerns they might have had about getting their money back. For example, if they sell the loan to Freddie Mac, who in turn sells it off to some Asian bank ... what does the lender care if the borrower defaults on the loan? That's right, they don't care. So, because of Freddie Mac and Fannie Mae, the lenders can offer mortgage loans to people they wouldn't normally consider. Make the loan. Sell it to the secondary market. Wipe your hands clean of any future repercussions or defaults. Nice and neat!

Oh yeah, and during this process, the folks at Freddie Mac and Fannie Mae make a ton of money! In addition to their government sponsorship (and sometimes complete bailouts), these organizations make millions each year from selling off the loans. Witness — the CEO of Freddie Mac made nearly $20 million in 2007 (while the company itself was dropping stock value like a bad habit).

What About Home Buyers?

So what does all of this have to do with a person buying a home these days? Well, suffice it to say that if Freddie and Fannie went belly-up, it would be even tougher to obtain a mortgage loan. It's already tougher in the wake of the subprime crisis that came to a boil last year. Buyers need much higher credit scores these days in order to qualify for the lowest rates on a mortgage loan. Without a secondary mortgage market, that could tighten even more.

But Who Really Benefits?

Some people in the government feel that homeownership should be made available to just about everyone. Hence, we have organizations like Fannie and Freddie to encourage lending to a larger pool of Americans.

But the hard truth is that some people just cannot afford to own a home. Period. If a person has a low credit score as the result of a bad financial history, the last thing they should do is buy a home. Especially a home they know they can't afford. They're only going to make their financial situation worse, because they will pay incredibly high interest rates on the new mortgage loan (as a result of having bad credit).

This is part of the reason we have record numbers of home foreclosures across the United States right now. Banks are giving mortgages to people who have no business taking on a mortgage.

So let's take a quick tally of who really benefits from the existence of Freddie Mac and Fannie Mae. Well, the people running these companies certainly benefit. They make millions in salary each year. The foreign investors certainly benefit -- at least in the beginning.

But do U.S. consumers benefit? Well, if you are one of the people who got into a new home courtesy of the secondary mortgage market, and you subsequently lost that home when the adjustable interest rate skyrocketed ... you might not feel so lucky. You may have wished somebody told you, "No, you should not own a home right now. You should fix your finances and your credit score first."

And if you've been paying attention, the federal government is more interested in bailing out private organizations and lenders these days. But they don't care much about the millions of Americans who have lost their homes.

What about the country as a whole? How do we benefit from the existence of Freddie Mac and Fannie Mae? In reality, not very much. As a result of the secondary mortgage market and money pits like the war in Iraq, we are more indebted to foreign banks now than we ever have been. In fact, these organizations harm our economy in the long run, by encouraging lenders to offer mortgage loans to poorly qualified borrowers ... the kinds of borrowers who become foreclosure statistics later on.

So, should we pump additional tax dollars into Fannie Mae and Freddie Mac to keep them afloat? Should we keep giving mortgage loans to people who simply cannot afford them? Should we plant the seeds for the next mortgage crisis and recession?

I say no. I say the hell with Freddie and Fannie. In the long run, we are much better off without them.

Getting the Lowest Mortgage Rates

All home buyers want the lowest mortgage rates when applying for a home loan, because it directly translates to a smaller mortgage payment each month.

And who doesn't want to shrink the size of their monthly payments?

But how does one obtain the lowest rates on a mortgage loan and, for that matter, why is it important in the first place? These are the subjects we will discuss in this tutorial for first-time home buyers.

Why Low Rates Are Important

First off, let's clear up some terminology here. When we talk about getting the lowest mortgage rates in this context, we are referring to the interest rate a lender offers you as part of your mortgage loan. Interest is a primary component of a home loan. It's the "I' in the acronym PITI (which stands for principal, interest, taxes and insurance).

By the way, you can learn more about this kind of terminology from our mortgage glossary on the main website.

In other words, the interest rate is one of the factors that will determine the size of your monthly mortgage payment. Now you can see why it's important to seek out the lowest interest mortgage rates when applying for a loan.

How Your Credit Score Relates

When you apply for a home loan, you be sure that the mortgage lender will request your credit reports and scores from all three of the credit-reporting companies (Experian, Equifax and TransUnion). Your credit score is one of the major factors that will determine the kind of interest rate they offer you.

Lenders reserve the best / lowest mortgage rates for borrowers who fall into a certain credit category. What score you need to qualify for this category will vary from one lender to another, but it's safe to say that the better (higher) your credit score, the lower the mortgage rate you'll receive.

Here's something not many home buyers realize. Over the last few years, the score needed to qualify for the best rates on a loan has risen. This is largely due to tougher restrictions on mortgage lenders (as a result of subprime mortgage crisis of 2007 - 2008). Today, buyers need a higher credit score to qualify for the lowest rates on a home mortgage loan.

Housing Market Recovery - 3 People to Ignore

There sure are a lot of people talking about the housing market lately, particularly on the subject of housing market recovery and economic rebound. When you look at recent trends in the real estate industry, it's easy to understand why there is so much buzz.

But it's also important to understand the difference between information and misinformation when it comes to housing market recovery -- or any other economic topic, for that matter. A home buyer in today's economy will be bombarded with conflicting information from all sides. The housing market is good. The housing market is bad. We are in a recovery period. We are still plummeting. Prices are climbing. Prices are dropping. It's enough to make you crazy.

But you can keep yourself sane by knowing which information sources to take with a grain of salt. To that end, here are some people worthy of skepticism when it comes to the housing market recovery and similar topics.

1. President George W. Bush

The president likes to say that we are going through a "rough patch." A bit of a hiccup, eh George? Now, I understand the need for positive thinking at such high levels. But a president who doesn't recognize and/or admit a full-on recession ... well, that's just scary.

There are other reasons George W. Bush cannot be trusted on the subject of housing market recovery and similar topics. For one thing, the subprime mortgage lenders helped pay for his presidential campaign. Yes, the same lenders who helped drive the country into a foreclosure crisis.

For example, it is a matter of public record that Roland Arnall (a billionaire executive from the Ameriquest subprime lending company) was one of Bush's top fundraisers. So any proposed legislation that would have curtailed the days of "subprime lending gone wild" met with stiff resistance from the then-Republican-controlled Congress and White House.

Ameriquest has also settled a lawsuit that accused them of deceptive lending practices. What does GW do? He appoints Ameriquest founder Roland Arnall to be ambassador to the Netherlands. Seriously, George? Are you sure you didn't mean to say the "nether regions"?

So when you see President Bush or one of his mouthpieces talking about the economy as a whole, or housing market recovery in particular ... take it with a grain of salt.

2. Anyone From Fox News

Sorry, right-wingers, but Fox is the most biased, one-sided news program on television in the United States. Come on now, admit it. When is the last time you heard them say anything good about a democrat, or bad about a republican? Fox News also loves to crank up the shock value, and they are widely known for shaping the "facts" to suit their transparent agendas.

So when you see anyone from Fox News talking about the housing market in any way, shape or form ... take it with a grain of salt.

3. The National Association of Realtors(r)

It always amazes me to see most news outlets in the country citing a nationwide drop in home sales, while at the same time the NAR proclaims a national rise in home sales. Now, I'm not accusing them of lying, but there is something to keep in mind here. Most of the data they use for their national "analysis" of the housing market is proprietary data from within their own organization. In fact, the NAR just went through a prolonged lawsuit with the Department of Justice over the management of their data, and whether it violates antitrust laws.

So when you see this organization (who has a vested interest in home sales) talking about housing market recovery ... take it with a grain of salt.

A Final Word of Advice

In closing, I would also warn you against giving too much credence to the real estate commentary of your neighbors, your coworkers, your hairdresser, the checkout guy at the grocery store, or your sister's husband's former college roommate who knows a guy who knows a girl who once worked for a real estate company.

In real estate, as with everything else in life, there are many people who mistake their opinions for fact. There are also many people who skew the facts to serve some kind of personal agenda. And with the speed and reach of the Internet, it doesn't take much to create full-fledged hysteria about the housing market or any other topic.

Dig deeper for the truth. Be a smart and skeptical consumer. Take what other people say with a grain of salt. Do your own research and form your own opinions. When somebody makes a statement about the housing market, ask yourself where their interests lie. Be a rational, free-thinking, intelligent individual. The economy can only benefit from having more people like that.

Brandon Cornett is the publisher of the Home Buying Institute, which educates consumers on how to buy a home, how to choose a mortgage, how to stop foreclosure and related topics. Learn more about this topic at http://www.homebuyinginstitute.com