Housing Act Aims at Easing Mortgage Credit Crisis

The housing bill President Bush signed into law in July contains a number of provisions aimed at restoring confidence in credit and housing markets by bringing financial help to homeowners facing or in foreclosure. It also offers aid to cities and states affected by high vacancy rates and abandoned housing following the worst housing crisis since the Great Depression.

The keystone of the new law, The Housing and Economic Recovery Act of 2008 (Pub.L. 110-289, H.R. 3221), is $300 billion in loan guarantees to refinance troubled mortgages and attempt to revive the slumping housing market. The new law authorizes the Federal Housing Administration (FHA) to insure distressed mortgage loans up to 90 percent of appraised value. The mortgage loans will then be refinanced into conventional loans carrying lower interest rates.

In order to participate, homeowners will in turn have to share any future appreciation in the value of their homes with the FHA. Lenders may have to write off a portion of the loan balance because the law requires existing mortgage holders to accept the proceeds of the insured loan as payment in full for all pre-existing indebtedness. The program will insure refinancing mortgage commitments made from October 1, 2008 through September 30, 2011.

The law also makes high cost housing markets eligible for FHA loans by raising loan limits to 115 percent of area median prices from 95 percent. The overall cap for loans under the formula rises to $625,500. The law also raises the limit on mortgage loans Fannie Mae and Freddie Mac can purchase to $625,000 from $417,000. It is estimated the new rules could help at least 400,000 homeowners avoid foreclosure.

To boost home sales, first time homebuyers will receive a refundable credit equal to 10 percent of the purchase price of a principal residence up to $7,500. The credit is phased out for taxpayers with incomes over $75,000, or $150,000 for joint returns. The credit must be paid back over 15 years in equal installments paid with annual income taxes.

The new law also toughens FHA loan rules by requiring a 3.5 percent down payment on any FHA loan, and prohibits seller financed down payments. But family members may give down payment assistance.

Cities and states will get $4 billion in Community Development Block Grant funds to help in dealing with the costs of vacant housing that came with the hundreds of thousands of foreclosures that have occurred during the crisis. The Department of Housing and Urban Development (HUD) has until late September to make rules and formulas for distributing the funds, and an additional 30 days to make the funding available to those states and cities that qualify for grants.

The law mandates, however, that HUD make the funds available only to cities and states most in need, using the number and percentage of subprime mortgage homes and the number and percentage in default as a measure.

In a further move to help ease the crisis on cities and states, the Federal Home Loan Banks (FHLB) will be allowed to guarantee tax-exempt municipal bonds. The provision means that cities will have additional financing options for projects such as housing, improvements to infrastructure and for economic development.

The law establishes the Affordable Housing Trust Fund funded by Fannie Mae and Freddie Mac. Each would contribute an amount equal to 0.42 percent of total new mortgages they purchase each year. The money would be used to fund the loan guarantees and, beginning in 2010, a percentage of the funds would be allocated to states for the construction and rehabilitation of affordable housing.

The law also adds new oversight of Fannie Mae, Freddie Mac and FHLB with the creation of a new "super" federal regulator, the Federal Housing Finance Agency. It will establish credit standards, internal controls, audits and risk management, among other rules, for portfolio management. It will have the power to put regulated entities into receivership and review and approve new product offerings of the enterprises.

Under the law, the new agency will enforce its orders through cease and desist authority, civil money penalties and the authority to remove officers and directors.