Introducing the Housing and Economic Recovery Act

Is it just me, or are others feeling like Bill Murray in the film Ground Hog Day, waking up and repeating the same thing each day: oil is up, market is down, real estate continues to drop; or the oil market is down and the stock market is up and real estate continues to drop. Well, while not quite so trite, there is an element of repetitiveness in the market, to say the least.

So what are we to do with signs of the declining real estate market that are all around us—from lingering “For Sale” signs on neighbors’ lawns to newspaper headlines detailing the continued fallout from the subprime lending crisis. Apparently, legislative relief is underway! After months of debate over whether bail-outs encourage risky investment decisions, Congress recently passed a bill to help prevent the increasing number of foreclosures from blighting towns and cities. On July 30, President Bush signed the Housing and Economic Recovery Act of 2008 (the Act), a broad bill designed to mitigate pain for over-extended borrowers, make home ownership more affordable and enhance regulation of Fannie Mae and Freddie Mac (1), as well as the Federal Home Loan Banks.

Billed as a win-win for homeowners and communities, the Act was described by Rep. Gregory Meeks, D-NY as the most important bill of the 110th Congressional Session. The safety net for financially strapped homeowners came not a moment too soon. According to the Center for Responsible Lending, 2.2 million families with a subprime loan issued from 1998 through 2006 have lost or will lose their home to foreclosure in the next few years.

Designed to restore confidence, liquidity and transparency to the credit markets, the Act establishes a new program entitled the HOPE for Homeowners Program, a voluntary program within the Federal Housing Administration (FHA) to provide insured, 30-year fixed rate mortgages to distressed borrowers. The HOPE Program is scheduled to begin on October 1, 2008 and sunset on September 30, 2011. Lenders who agree to reduce mortgages for at-risk homeowners to at least 90% of the property’s current value will be granted government insurance for those reduced loans. In return, borrowers must share any future appreciation with the FHA, thereby ensuring the government recoups its investment over time.

To be eligible for the HOPE Program, borrowers must:

  • Have a loan on an owner-occupied principal residence. (Investors, speculators or borrowers who own second homes cannot apply.)
  • Have a monthly mortgage payment greater than at least 31 percent of their total monthly income, as of March 1, 2008.
  • Certify that they have not intentionally defaulted on an existing mortgage, obtained the existing loan fraudulently, or been convicted of fraud.

To make homeownership more affordable, the Housing and Economic Recovery Act of 2008 includes:

  • A refundable tax credit for first-time home buyers that works like an interest-free loan of up to $7,500 to be paid back over 15 years.
  • $11 billion of additional tax-exempt bond authority in 2008 that states can use to refinance sub-prime loans, make loans to first-time homebuyers and finance the building of affordable rental housing.
  • An increase in loan limits for the FHA, Fannie Mae, and Freddie Mac to $625,500. (Because of the high cost of housing in California, a majority of residents were previously shut out from these programs.)
  • An additional $1,000 deduction for property taxes for couples using the standard deduction, $500 for individuals.

Special foreclosure provisions of the Housing and Economic Recovery Act of 2008 seek to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis. For example, a new permanent, affordable housing trust fund (financed by Fannie Mae and Freddie Mac and not by taxpayers) will fund the construction and preservation of affordable rental housing for low income individuals and families nationwide. And, to strengthen neighborhoods hardest hit by the foreclosures, the Act provides $3.9 billion in community development grants to states and localities to buy and rehabilitate foreclosed homes to stabilize the housing market.

Finally, to prevent future abuses by lenders, the Act establishes a nationwide loan originator licensing and registration system responsible for setting minimum standards for all residential mortgage brokers and lenders. It also strengthens mortgage disclosure requirements to help ensure that borrowers understand the terms of their mortgages. An additional section, the “Federal Housing Finance Regulatory Reform Act of 2008,” establishes a new, independent regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This regulator’s broad authority, equal to that of other federal financial regulators, extends from establishing capital standards to reviewing new product offerings.

Widely praised by real estate industry groups, we’ll watch to gauge the impact that the Housing and Economic Recovery Act of 2008 will have for consumers and whether it can stop the housing market’s slide. In the meantime, we have to maintain our discipline and “stay the course” in order to receive investment returns we so deserve in the long term.

1. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government sponsored enterprises of the United States. They are stockholder-owned corporations authorized to make loans and loan guarantees. Together, they own or guarantee about half of the U.S.’s $12 trillion mortgage market.

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