The US residential real estate market is caught in the worst correction in decades with few reasons to be optimistic as the economy worsens, according to a key housing report released Monday.   “Despite unprecedented federal efforts to stimulate the economy and help homeowners make current mortgage payments, house prices continued to fall and home foreclosures continued to mount in most areas through the 1^st quarter of 2009,” according to the executive summary of the State of the Nation’s Housing annual report released by Harvard University’s Joint Center for Housing Studies.   “While new and existing home sales and single-family starts have shown some signs of stabilizing, ongoing job losses, house price deflation and tighter mortgage underwriting and credit are placing any recovery at risk,” the report said.

“Although there are some signs of improvement or at least steadiness in new construction and sales, housing starts stand near 60-plus year lows, and any life in home sales is coming from distressed foreclosure sales, temporary 1^st -time buyer tax credits and low mortgage interest rates for purchase and refinance that moved higher in recent weeks,” said Nicolas Retsinas, director of Harvard’s Joint Center, in a press release.  “The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery,” added Eric Belsky, executive director of the Joint Center.  “For now, markets remain under considerable stress,” Belsky said.

The bleak study coincided with a separate report from the World Bank warning of more damage in the global economy.   This week, investors will be focusing on housing data and any commentary the Federal Reserve offers on the economy.  “On the economic front, new and existing home sales should show improvement but from very low levels,” said David Kelly, chief market strategist at JPMorgan Funds. “The recent back-up in FHA mortgage rates, although unwelcome, really should not be enough to prevent pent-up demand and still very good affordability from triggering a housing rebound.”   Resource: John Spence, Jeff Moran

Just last week, the Secretary of HUD announced new federal guidelines for FHA home loans which allow First-Time Homebuyers (FTH) to monetize their $8,000 Obama Tax Credit upfront, for use toward their down payment or closing costs, rather than only after close of escrow.  How will this work? No one really knows yet – federal lending guideline changes usually take a month or so to manifest into concrete checklists and phone numbers you can call to take advantage of them. But it looks like state Housing Finance Agencies and HUD-approved nonprofit organizations will be involved, and will provide the upfront funds to borrowers (for a small fee, of course), which they’ll be reimbursed at tax time next year.

However, the author of the article, noted that she has not heard anyone actually suggest that the upfront monetization of the FHA tax credit won’t be effective at stimulating home sales. On the flip-side, the National Association of Home Buyers’ projections show that about 160,000 homes will be sold as a direct result of this new incentive. But there are folks who don’t like it, and their arguments tend to focus on the worry that no-skin-in-the-game borrowers are the sort of problem homeowner who created the market madness by just walking away when their homes devalued. The pestimistic crowd says that that we might be returning to the bad old days of 100 % financing.

FHA loan overview:
This is a new era of mortgage lending than the stated income days of old (old =2005). It wasn’t no-skin-in-the-game borrowers who walked away and created the foreclosure crisis, it was no-skin-in-the-game borrowers who couldn’t afford their escalating mortgage payments who were the problem children of the real estate market. The upfront monetization of the $8,000 tax credit will only be available for FHA loans, which require full documentation of income, impose strict and low debt-to-income ratios and are characterized by low, 30-year fixed interest rates and payments. This is not a return to the subprime era, when you only needed to be human and alive to get a loan (notwithstanding those few times we saw the deceased and the canine get mortgages).

On careful reading of the few details we do have on this program, it’s clear that it does not, in fact, reduce the amount of down payment funds that need to be deposited by the buyer to get an FHA loan. The $8,000 credit cannot, under current law, be used to meet the minimum 3.5% down payment requirement (although gifts from relatives can). The upfront $8,000 is available for home-buyers to use as extra down payment money (to buy more or lower monthly payments), to pay discount points (reducing their interest rates) or to defray closing costs.  That’s it.

This FHA loan program changes the time frame in which First-Time Homebuyers who close escrow by December 1, 2009 will be able to benefit from their tax credit. Frankly, I’d imagine this will mean lots more folks will put the funds into their homes and into making their loans more affordable. 

Compare FHA mortgage rates and FHA lending costs: Borrowers have never been in a better position to qualify for lower mortgage rates.  We suggest analyzing 3 loan offers from different lenders or brokers.  Compare interest rates, loan amounts, origination fees, discount fees, processing fees, underwriting fees and the appraisal fees. Don’t forget that with FHA refinance loans all cash out transactions above 85% Loan to Value now require 2 appraisals from FHA licensed appraisers.  Don’t forget to factor in the upfront mortgage insurance premium, with FHA mortgage loans.  See the complete article at FHA Home Loan Costs.