Congress Acts to Assist Low Income Homeowners
Allow me to introduce myself as a new contributor to UrbanDigs.com. I've always enjoyed following politics, whether good or bad. After a stint as a bank analyst with the Fed I've been following how regulatory actions affect business and markets. For this site I'll be focusing on how government policy affects the housing market and welcome your comments. So on to my first post below.
- Beth
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The White House’s ‘rate freeze’ plan proposed by Hank Paulson isn’t the only program coming out of Washington to address the subprime mess.
On Friday the US Senate overwhelmingly passed a bill that will enable the Federal government to assist at least 200,000 subprime borrowers facing foreclosure. According to CNN Money:
Christopher Dodd (D - Conn.), the sponsor of the Senate bill, which passed last week, hopes to make low-cost, fixed-rate mortgages available to more homebuyers and to homeowners seeking to refinance out of expensive adjustable rate mortgages (ARMs).The bill will allow homeowners to obtain mortgages requiring low down payments and low rates with the assistance of the Federal Housing Authority (FHA), part of the U.S. Department of Housing and Urban Development.
"This measure can shield homeowners from harm by helping families find safe, fair and affordable mortgages," said Dodd in a statement. It can help provide credit, both for new homeowners and those seeking a way out of abusive loans in which they are currently trapped."
FHA mortgages are consumer friendly loans made by private banks that are insured by the government. That makes them especially attractive to lenders because the government guarantee enables the lenders to easily sell off the loans.
Lower income homeowners could have turned to the FHA in the first place, but the agency’s criteria couldn’t compete with subprime lenders for lower income applicants, most of whom earn around $55,000 per year.
The Senate bill would lower the down payment requirement from 3% to 1.5% and increase the amount of mortgages the FHA may insure from $130,000 to $417,000. The House of Representatives passed a similar bill in September, which allows for higher loan limits and more flexible repayment terms. The House bill would also establish a new trust fund that would require contributions from the FHA.
The FHA’s insurance program is intended to offer an easy option for homeowners who qualify for Paulson’s mortgage “subprime rate freeze” plan to refinance. It could also extend to those homeowners who may not qualify for the Paulson plan; as Noah wrote about on December 6th. The plan uses no public funds, instead covering its costs by charging a fee to home buyers.
Either bill sounds like a win for homeowners who can benefit from extra help. Once the House and Senate versions are reconciled the President is expected to sign the resulting bill into law.
Posted by Noah
Wed Dec 19th, 2007 03:41 PM
welcome aboard Beth! I know you'll provide valuable insight into the changing world of regulations on the lending industry and fed plans in the coming years!
As for this post, do you see any future plan that WILL use public taxpayers funds?
Posted by Beth
Wed Dec 19th, 2007 05:47 PM
Thanks, Noah! Great to be here.
Re: use of taxpayer funds, it's difficult to tell at this point but I wouldn't be surprised if another program comes about, especially given that an election year is upon us.
That said the White House's 'free market' approach would presumably advocate programs that would entail the least use of taxpayer funds.
A big factor will be how this legislation plays out - it also includes provisions to regulate mortgage lending practices, and the House version is more stringent. But this is for loans going forward, not current borrowers. Nevertheless, new regulations mean that some agency needs to administer the new rules for enforcement. And that costs money.
Posted by drtomaso
Wed Dec 19th, 2007 09:52 PM
"The House would set the cap at $729,750, which is more than twice its current amount."
So now the feds are going to start insuring Jumbos? How many "low income" home owners needed the cap raised to $730k?
All these proposals do one thing: relax lending standards. This is like fighting lung cancer by moving from 1 pack a day to 2.
Further, no one seems to be considering what happens when these loans are defaulted on- as some inevitably will. Does the fee charged to buyers include the expense of making good on the insurance?
Posted by Noah
Thu Dec 20th, 2007 09:11 AM
tomaso makes a good point but I do not think these plans reach out to enough borrowers to call it a re-laxing of standards. Banks are quite aware of their risks now, and tightened standards on their own after suffering huge losses. This will continue.
this is just another band aid on a gunshot wound and is more political window dressing to show that this administration is doing something about this problem. Expect more of this in an election year.
Posted by Beth Olarsch
Thu Dec 20th, 2007 09:18 AM
Good questions, drtomaso. Before the bill is signed into law both the House & Senate versions must be reconciled, so the actual amount will likely be much lower than $729,750.
The scary thing is how many of those who would qualify for the FHA program own houses that were valued that high.
As for relaxing lending standard, both bills actually include proposals to clamp down on mortgage lending practices, which I'll go into in an upcoming post. The Fed has also proposed a program along similar lines.
As for the risk of default, the House bill includes a provision for a $300 millin trust fund comprised of FHA profits.
The reality is that there are no guarantees against default. This legislation is trying to make an exising program more readily available to the public.
Posted by Beth Olarsch
Thu Dec 20th, 2007 11:03 AM
I agree with you Noah, this will only help a limited number of homeowners.
It's our Democratic Congress trying to "show the love" on this one, and to demonstrate that they're taking a stronger stance than the administration. Even though we have a Republican President who's a lame duck, one version of this bill will likely be enacted.
Posted by Brenda
Fri Dec 21st, 2007 05:19 PM
Well, other than California, what are some of the states most affected thus far by this mess? Definitely Florida and Michigan, and I think Ohio and Pennsylvania as well. Very important election-year states.