Finance Globe

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President Bush Signs Housing Bill

President Bush signed the housing rescue bill into law on Wednesday.
The new laws have two main objectives; to help struggling homeowners refinance into affordable loans guaranteed by the Federal Housing Authority (FHA), and to give additional funding to Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that buy or back about half of all U.S. mortgages. These actions are hoped to bring stability back to the housing market and give a boost to our sliding economy.

The FHA is given a bigger role in the U.S. housing market.
The housing law allows the FHA to insure up to $300 billion in new 30-year fixed rate mortgages. The Congressional Budget Office (CBO) estimates that only about $68 billion of that will be used, helping to keep about 325,000 families in their homes.

The voluntary program provides for owner-occupied homes to be refinanced into an affordable government-back mortgage, but lenders must be willing to write down the amount of the loan to 90% of the home's current appraisal value.

To qualify, the borrower's mortgage debt payment must exceed 31% of their income, the loan cannot be for more than 90% of the home value, and borrowers must be able to afford their home under the terms of the new loan.

Lenders are given the opportunity to choose the lesser of two evils, when they agree to take a loss by allowing a borrower to refinance for less than the loan amount. Lenders' other option would be to hold on to a risky loan with a troubled borrower, and face the costs involved with foreclosing on and selling the home in a declining market. The new law puts the responsibility of helping troubled homeowners on the shoulders of mortgage lenders who originated these risky loans.

The original lenders will have to pay up-front fees into an insurance fund and borrowers will have to pay insurance premiums of 1.5% a year, to help protect taxpayers from losses due to default. The CBO estimates that about 35% of loans that are refinanced under the new program will eventually end up in trouble again.

The Treasury can bail out the GSEs if they need help.
The new law also allows the Treasury to rescue the GSEs if they need additional funding. The CBO estimates that the program may cost taxpayers $25 billion a year for the next two fiscal years. The budget office says that there's a more than 50% chance that the GSEs would not need any additional funding, costing the taxpayers nothing, and that there's a 5% chance that it may cost $100 billion.

Fannie Mae and Freddie Mac are publicly traded companies whose share prices have plummeted in the aftermath of the mortgage meltdown. Critics of the program say that help from the government leaves taxpayers to pay for the risk and loss associated with investing in these company's stocks. Treasury Secretary Paulson said that merely having the powers in place may boost the two companies enough to preclude the need for the Treasury to step in.

The housing bill covers additional concerns:
  • A regulator with a stronger say in how well funded the GSEs are, a major concern contributing to the recent volatility in those company's stock prices and the uncertainty in the financial markets.
  • Raises the limits on "conforming loans" and FHA loans in high-cost areas to $625,000. Higher loan limits will make it easier for borrowers to get loans; conforming loans are more easily traded among lenders, freeing up additional funding to originate more mortgages.
  • Gives a new home-buyer credit of 10% of the home purchase price, with a $7500 cap. This "credit" is actually an interest-free loan which has to be paid back in fifteen annual installments.
  • Bans a program which allowed sellers to assist buyers with the down payment for FHA loans. The law also raises the down payment requirement for FHA loans to 3.5%, up from the previous 3% down requirement.
  • Establishes an affordable housing fund, paid for from fees collected from Fannie Mae and Freddie Mac.
  • Grants of $4 billion to local governments, to buy and rehabilitate foreclosed properties. The White House opposes this measure, saying it will benefit the lenders rather than homeowners.
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Thursday, 09 July 2020

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