The strong home price appreciation that the housing market experienced from 2000 through 2006 was great for homeowners. Increases in home values helped those households build equity and wealth.

However, that price appreciation had a downside as well. It made achieving homeownership much more difficult for first-time buyers and those potential buyers with less-than-perfect credit, particularly when mortgage rates began to rise from historic lows in mid-2005. As rates increased, average monthly payments also rose. The consequence was that home sales fell as fewer people could afford to buy. Additionally, beginning in mid-2007, many homeowners who had taken out adjustable rate mortgages (ARMs) to finance their purchases made after mid-2005 could not refinance. Stagnant or declining prices reduced or eliminated the equity in their home. Unable to refinance, households were faced with making monthly mortgage payments that they could no longer afford. The impact of this trend was particularly harsh on the sub-prime market as funding in this sector evaporated after July of 2007. Default and foreclosure rates increased as a result.

Some Relief in Sight
The good news is that there is some relief on the way. One month ago, Congress passed and the President signed an important stimulus package that goes far beyond the well-publicized $600 tax rebate check. The package includes a provision that will temporarily increase FHA lending limits and the limits on loans that the GSEs can buy.

Prior to 2008, the FHA could only loan up to a maximum of $362,790 for a home in the highest priced markets; most markets had lower limits. Under the new provisions, that limits jumps to as much as $729,500 depending on the local median home price. Based on 2007 mortgage data, NAR Research estimates that more than 140,000 homes in this price category were purchased using sub-prime loans.

FHA vs. Subprime
FHA loans compete with sub-prime loans for borrowers with lower credit standards. However, the FHA has a longer history of lending and has government support, so borrowers receive mortgages rates that are 3.0 percent lower on average than those of subprime loan. In addition, these FHA loans require inspections; users of the FHA program know about issues with their home up front and so can budget accordingly. In short, FHA loans cost home buyers less up front and allow them to budget their long-term expenses more accurately. Finally, FHA has programs in place to keep owners out of foreclosure if they become delinquent – a lesson the private, subprime sector is currently learning.

FHA and Housing Demand
Because FHA loans are considered safe, the increased FHA limits will help stimulate housing demand from buyers with less-than-perfect credit. That in turn will help to support prices, enabling owners facing re-setting of their mortgage-interest rates to refinance into more affordable loans. This will further undercut the precarious position of housing markets with large concentrations of sub-prime ARM loans.

Increased GSE Loan Limits
Equally important are the effects that increased GSE limits will bring. The GSEs, Fannie Mae and Freddie Mac among others, buy up loans, repackage them, and sell them in the secondary market. The GSEs’ loose relationship with the government is viewed by buyers of mortgage backed securities as insurance – that the risk on these mortgages is much lower than that on mortgages not backed by the Federal government or the GSEs.

The subprime meltdown last summer caused the spread between conforming mortgages rates, those at or below $417,000 that by law could be backed by the GSEs, and jumbo rates to surge nearly a full percentage point. This increase knocked many would-be buyers out of affordability. The difference between 6% and 7 percent is magnified on a monthly payment as the home’s value increases. Now that the GSEs can buy loans above $417,000 up to $729,750, mortgage rates on non-GSE backed loans in this range will likely come down as well. This change will help to boost demand in the volatile, high-priced markets on the east and west coasts.

Impact on Markets
Nearly every county in the county will benefit from this change. Of the 3,190 counties in the United States, 100 will see an increase of 100 percent or more in their FHA loan limit. An additional 3,070 counties will receive an increase of 30 percent or more in their FHA loan limits. Many of the high-priced markets on the east and west coast will experience sharp increases in FHA limits. On average, counties in California will experience an increase of $185,361, with many counties in Los Angeles, San Diego, and San Francisco receiving more. Lower priced areas in the central valley that are experiencing sharp foreclosures – including Modesto, Sacramento, and Stockton – will also experience significant boosts. Washington, D.C., New York City, Boston, and Chicago are just a few of metro areas that will experience sharp increases in both FHA and GSE limits.

However, it’s not just large metros and suburban areas that will benefit. There are many smaller markets that will feel the positive effects of increased loan limits. Some smaller, coastal counties in New Jersey, North Carolina, and Virginia as well as Nantucket have received substantial increases in their loan limits. Other areas have received sizable increases such as popular counties in Colorado outside of Denver and Boulder as well as Lancaster, Ohio and recent boom markets like Wasatch, Utah.

Finally...
The new FHA loan limits combined with the new GSE loan limits will go far to re-vitalize demand in today’s sagging housing market. More importantly, these changes will help to strengthen confidence, the fabric of the industry’s damaged mortgage market, and it will do so at the local level.

(ARA) - As spring home buying season begins, financing options remain available for borrowers who do not have the traditional 20 percent down payment.

“Even with home prices declining in many areas, many families still find it difficult to accumulate a 20 percent down payment,” says Suzanne Hutchinson, executive vice president of the Mortgage Insurance Companies of America. ”Low down payment insured loans are a key financial tool in the overall effort to keep the dream of homeownership alive in a volatile market.”

Although the real estate market is tumultuous, there are still safe, predictable and responsible financing options for buying a home. "Most are better off because the risky, exotic loans have largely disappeared from the market, and also fortunate because more secure loans with tax-deductible private and government mortgage insurance are still available for qualified borrowers," says Bruce Hahn, president and CEO of the American Homeowners Grassroots Alliance.

And Congress is helping many buyers with a federal income tax deduction for mortgage insurance premiums on home purchases or refinancing starting in 2007. This is the first-ever tax deduction for government and private mortgage insurance.

The tax deduction was first approved by Congress in late 2006 and applied to loans with mortgage insurance that closed in 2007. In an important move to further assist borrowers, Congress voted in December of last year to extend the mortgage insurance tax deduction through 2010 as part of the Mortgage Forgiveness Debt Relief Act of 2007.

The deduction allows households with an adjusted gross income of $100,000 or less to deduct the full cost of their government or private mortgage insurance premiums on their federal tax returns. Families with incomes between $100,000 and $109,000 are eligible for a reduced deduction. On average, the tax break could be worth $350 per taxpayer.

Approval of the tax deduction by Congress -- and extending it through 2010 -- was strongly supported by a number of consumer, civic, African American and Hispanic groups.

“Making the cost of mortgage insurance tax deductible helps those who need it most: low- and moderate-income Americans, primarily first-time home buyers, who are financially responsible but simply don’t have the means to amass a 20 percent down payment,” Hutchinson says.

Buying a home is usually the biggest financial decision for any family. With riskier mortgage financing options, such as interest-only loans and piggyback mortgages, quickly fading from the marketplace, low down payment loans with mortgage insurance remain readily available for qualified borrowers.

An added benefit is that private mortgage insurance can be canceled when the home owner builds up sufficient equity in the home, with nine in 10 borrowers canceling private mortgage insurance within 60 months.

For more information on tax deduction and home loans with low down payments visit www.privatemi.com.

Friday's Personal Finance stories

Housing's Second Wind
by Ken Fears, Manager, Regional Economics

How to Make a Low Down Payment Loan Work for You

Friday's Personal Finance stories

Housing's Second Wind by Ken Fears, Manager, Regional Economics

How to Make a Low Down Payment Loan Work for You

Housing's Second Wind
by Ken Fears, Manager, Regional Economics