Housing rescue bill, part II
Over the weekend, Congress approved the housing rescue bill -- which was designed to help thousands of homeowners avert foreclosure and extend a lifeline to Fannie Mae and Freddie Mac if they need it. 
Today, Treasury Secretary Henry Paulson unveiled another piece of the government's plan to help shore up the housing market: greenlighting banks' use of so-called covered bonds to pump more money into the U.S. mortgage market.
"I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions by providing a new funding source that will diversify their overall portfolio," Paulson said in a statement.
Maybe. Wall Street was less-than-enamored with the idea, as markets columnist Tom Petruno explains on his blog Money & Co. He also explains how these bonds work, noting that they are big in Europe.
In a commentary today entitled "Will the 2008 housing bill save the housing market?," William Wheaton, (registration required) a MIT economics professor and a principal at Torto Wheaton Research, sees the Fannie and Freddie safety net as the key -- and perhaps only -- worthwhile provision of the housing bill. He sums up the situation thusly:
"What the current housing market needs is more sales, more transactions and a return to liquidity with normal moving/mobility. This, coupled with continued low new construction, will reduce the inventory of unsold units and allow prices to stabilize and then recover."
-- Annette Haddad
Photo: Treasury Secretary Henry Paulson, center, gestures during a news conference today, flanked by FDIC Chair Shelia Bair, left, and Federal Reserve Gov. Kevin Warsh.
Credit: Associated Press
Questions? Comments? Email: annette.haddad@latimes.com
bull $%^&$ it
Posted by: mike | July 28, 2008 at 05:27 PM
What the housing market needs, imho, is more transparency, both in the financial statements of the banks and other lenders, and in the data on the RE market itself. Other than that, they just need time and a lack of socialist interference to work themselves out.
Oh, and if you want mortgage rates to be anywhere near affordable, the market also needs inflation to be under-control, so banks can feel ok about giving out 30-year fixed rate loans in the single digit range. A nice start might be to restore some credibility to the inflation measurements by overhauling the CPI to remove blatant manipulations like hedonic regression. You could follow up by reminding the Fed that their job is to control inflation, not pad pockets of banking insiders. Those things would also help the housing market, as well as the general US economy in the long-term.
Posted by: Nick | July 28, 2008 at 06:35 PM
WSJ brings up an interesting point. The FHA bailout portion of the bill has a loophole allowing borrowers who get their principle written down to cash in on the whole appreciation (assuming it appreciates) amount when they sell (instead of the 50% called for in the bill). The borrower just has to refi out of the FHA loan before they sell.
This will cause adverse selection in the FHA pool, the bad non-performing loans will stay in the pool and the good loans will refi out ASAP (since they didn't pay the upfront mortgage insurance premium, the breakeven math is very simple). About when they get to 80% of loan-to-value so they can refi into a traditional loan and drop the very expensive FHA mortgage insurance (set at 1.5% of principal).
Continued depreciation will foil any refi plan but there is still many ways to game the system. For example, if you had friends and family helping with the mortgage but not on the mortgage and you are paying fine right now, you could still get the principal written down and then resume paying the lower amount with your friends and family. If you have a lump sum sitting in the bank but unwilling to continue paying your mortgage at the high rate you could get the free refi with principal reduction, pay off 10% extra and refi into a tradition loan with a much lower payment. The good news about those scenarios is it is the lender taking it in the shorts, not the FHA (actually those loans will help the FHA by building a reserve quickly).
It will definitely be interesting to see the underwriting guidelines that the FHA will come out with. There has been 2 articles on American Banker about the FHA dragging their feet on implementation and saying they won't have the guidelines ready until next year instead of October 1st.
Lots of gameship going on by both sides. We shall see who comes out on top.
Posted by: Cal | July 28, 2008 at 10:24 PM
How about some legislation to regulate the appraisers? Seems to me that between the blame laid on the lenders and the buyers who really couldn't afford, the appraisers who helped the artifical price inflation have not been given their rightful share of the blame.
Posted by: The original RZ | July 29, 2008 at 09:21 AM
More useless crap legislation that solves nothing. Billed to the Public via the press as a rescue but has no use for the average homeowner or buyer. When was the last time one of our legislators actually experienced what the majority of homeowners are experiencing right now? When was the last time they did not have 20% or more to put down on a home? When have they actually spoken to real people, the everyday man, or the average first time homebuyers to find out what their needs are?
Posted by: ERIN | July 29, 2008 at 10:02 AM
I asked Sen. Boxer, "Please, no bailout." This is what she sends me - a self-congratulatory note that she's gotten bailout legislation through. Can someone please run against Sen. Boxer (and Sen. Feinstein & Rep. Waxman) next term?
===========================================
Thank you for contacting me regarding the current foreclosure crisis. I appreciate hearing from you.
I am pleased that the Housing and Economic Recovery Act of 2008 has passed Congress and was signed into law on July 30, 2008 as P.L. 110-289.
Although this legislation will not solve all the problems in the current crisis, it includes wide-ranging measures to help stabilize the housing market, provide help to homeowners and renters, and help get our economy back on track. The new law also helps communities that have been hit hardest by the foreclosure crisis by providing $3.9 billion in emergency assistance to purchase and redevelop abandoned and foreclosed properties.
I am enclosing a document of frequently asked questions , which I trust will explain the way the bill will work.
All of the costs of this legislation are covered by revenue-raising provisions within the Act, ensuring that P.L. 110-289 meets pay-as-you-go standards. The Hope For Homeowners program is narrowly tailored to keep families in their homes. No speculators, investment properties, or second or third homes will be refinanced. Similarly, lenders will have to take a significant loss on the original loan, waive any penalties or fees, and help pay for the origination and closing costs of the new loans.
The goal of this bill is to help keep families in their homes and stop the further deterioration of the communities we hold so dear. I will do everything in my power to make sure this bill does that job, but if more legislation is needed I will not hesitate to fight for it.
Again, thank you for writing to me. Please do not hesitate to contact me in the future on this or other issues that concern you.
***
ABCs of the "Housing and Economic Recovery Act of 2008"
On July 30, 2008, the President signed into law the Housing and Economic Recovery Act of 2008 to address the ongoing housing crisis. Although the crisis will not end with this legislation, it is an important first step to help keep families in their homes and stop the further deterioration of the communities being hardest hit.
Q: How will the law help struggling homeowners keep their homes?
A: Through the Federal Housing Administration (FHA), an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages. The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90% of the property's current value.
Q: When will the program begin?
A: The program will begin on October 1, 2008 and sunset on September 30, 2011. H omeowners in danger of losing their homes before October 1, however, should not wait to contact their loan servicers and should begin applying for federal ly insured mortgages now.
Q: Who is eligible?
A: To be eligible to participate in this program, a borrower must:
Have a loan on an owner-occupied principal residence. Investors, speculators, or borrowers who own second homes cannot participate in this program.
Have a monthly mortgage payment greater than at least 31 percent of the borrower's total monthly income, as of March 1, 2008.
Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently.
Not have been convicted of fraud.
Q: How can a homeowner access this new program?
A: Homeowners or a servicer of an existing eligible loan need to contact an FHA-approved lender. The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program. If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage. Loans provided under this program must be 30-year fixed rate loans.
Q: Are lenders required to participate in this program?
A: No. The program is completely voluntary for lenders, investors, loan servicers, and borrowers.
Q: How does this law help neighborhoods that have been hit by the foreclosure crisis?
A: The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities, and governments across the nation. The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market.
Q: Will this law be a bailout for speculators, homeowners, investors, and lenders?
A: No. It is narrowly tailored to keep families in their homes. For example:
Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
Investors and lenders must take big losses first in order even to participate. The owner of the old mortgage can get a maximum of 90% of the current value of the home (which presumably will be considerably less than the value of the original loan). In many cases the loss will be significantly greater, but 10% is the minimum.
In addition, lenders must waive any penalties or fees, and help pay for the origination and closing costs of the new loans.
Most homeowners will have seen the equity in their homes disappear before being able to refinance under this program. In addition, the FHA will get a portion of any future profits on the house, to make sure the government recoups its investment over the long run.
Q: Will this law reward families who bought homes they could not afford?
A: Many homeowners facing foreclosure were misled, were deceived, or were in other ways the victims of unfair lending practices.
To prevent future abuses by lenders, this law will establish a nationwide loan originator licensing and registration system to set minimum standards for all residential mortgage brokers and lenders. It also strengthens mortgage disclosure requirements to help ensure that borrowers understand their mortgage loan terms.
Q: How will this law make it more affordable to own a home?
A: There are a number of provisions that will make homeownership more affordable:
Creates a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years).
Grants states $11 billion of additional tax-exempt bond authority in 2008 that they can use to refinance subprime loans, make loans to first-time homebuyers and to finance the building of affordable rental housing.
Raises conforming 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 the state's residents were previously shut out from these programs. Raising these loan limits will lead to lower interest rates on some loans, greater refinancing opportunities, and enable more borrowers in high cost areas to avoid the type of nontraditional and frequently abusive loans that led to the current crisis.
Provides couples using the standard deduction with up to an additional $1,000 deduction for property taxes ($500 for individuals).
Q: Does the law provide help to those who still cannot afford to own a home?
A: Yes. The bill includes a number of provisions to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis. For example:
The bill creates a new permanent affordable housing trust fund - financed by Fannie Mae and Freddie Mac and not by taxpayers - to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.
In addition, the legislation provides a temporary increase in the Low-Income Housing Tax Credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.
Barbara Boxer
United States Senator
Please visit my website at http://boxer.senate.gov
Posted by: SMMR | July 31, 2008 at 12:04 PM