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Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.
• Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages
2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.

According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior. 

This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.

Now, it's worth stating that all real estate is local and that there's no such thing as a "national real estate market", but for home buyers looking to to maximize their negotiation power to get the best possible "deal", spotting trends like this before the media does is a good thing.

So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report.  By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.

We shouldn't dismiss annual trends because they're helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it's the month-to-month data that matters most. 

After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets.  And, in some, they've already started to recover from their lows.

Source
U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman
Bloomberg.com, August 26, 2008

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan. 

With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.

So far this year, mortgage insurers have paid out $6 billion in claims.

In response to the losses, the mortgage insurance industry is using two tactics to return to profitability -- and both mean bad news for homeowners.

1. Raise the minimum standards to get insurance
2. Raise the annual mortgage insurance cost

This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.

Because of the higher PMI rates, it's getting more expensive for small-downpayment home buyers to finance their homes.  And that's if they can even still get mortgage insurance. 

Some mortgage insurers now require a 10 percent minimum downpayment in certain states.

So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult.  If you plan to make a small downpayment on your next home -- or plan to remortgage your current low equity home -- consider moving up your timeframe.

It may not be as cheap or as easy to get financing as it is today.

(Image courtesy: The Wall Street Journal)

Tax Credits:

First-time buyers and people who have not owned a home in the past three years will get a $7,500 tax credit if they purchased a home on or after April 9, 2008 or if they purchase one before July 1, 2009.

Income limitations are:

§ Married couples with incomes less than $150,000 qualify for the entire tax credit. The tax credit phases out for married couples with incomes between $150,000 and $170,000. Couples with incomes exceeding $170,000 do not qualify for the tax credit.

§ Singles with an income less than $75,000 qualify for the entire tax credit. The tax credit phases out for singles with incomes between $75,000 and $95,000. Singles with incomes exceeding $95,000 do not qualify for the tax credit.

The tax credit is really an interest-free loan from the government that must be paid back over fifteen years, in increments of $500 a year.

§ If you die, your heirs do not have to pay back the remaining balance.

§ If you sell your home before fifteen years have passed and your home’s appreciation is less than the amount you have to pay back, the loan is forgiven.

• If you turn your home into a rental or investment property, you must pay back the balance due.

By measuring the number of "Pending" homes nationwide, the National Association of Realtors^® publishes its once-monthly Pending Homes Sales Index.

The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will "close" within 60 days, and most others will close within 120 days.

But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use. 

This is because of the index's methodology:

1. It doesn't measure new construction homes
2. It doesn't track For Sale By Owner properties
3. Its sample set covers just 20 percent of MLS transactions

In addition, in a tough mortgage climate such as the one we're in now, a greater percentage of pending sales will fail to close at all because of lack of financing.

The Pending Home Sales Index still has its place, however -- it's a terrific look at the buy-side demand for homes. 

When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength.  After all, pending sales can't happen unless there are buyers out there.  And with more buyers competing for homes, home prices tend to rise.

This is why the June's Pending Home Sales report is so intriguing. 

In June -- for the second time in three months -- the Pending Home Sales Index posted a large gain even as economists were calling for a loss.  The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.

Now, again, the uptick doesn't mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding "now" to be a good time to buy real estate.

That sort of insight is what make the Pending Home Sales Index worth tracking.  When buyer demand is rising, the real estate market isn't usually far behind.

Monday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:

• First-time home buyers get a $7,500 purchase "credit"
• Conforming loan limits move to $625,000
• Delinquent homeowners get a lifeline from the FHA
• Local governments get federal money for buying and restoring foreclosed homes

However, tucked away on the last few pages of the text, in a section called "Revenue Offsets", there's an important tax implication.  The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.

Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.

Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains. 

The new law thwarts this tactic. 

Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.

In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it.  As always, however, it's best to talk with a qualified accountant about how tax code changes may impact you personally. 

The new capital gains rules go into effect starting January 1, 2009.