Breaking Down the Housing Rescue Bill

President Obama signed the Housing Rescue Bill intended to rescue about 15 percent of the cash-strapped homeowners in fear of foreclosure in the next year or so.

The legislation is regarded as the most significant housing bill in decades. It won approval from lawmaker’s eager, in an election year, to come up with an answer to the growing housing crisis.

"By expanding homeownership opportunities and protecting families against foreclosure, we are helping keep the American Dream alive," said House Speaker Nancy Pelosi, D-Calif.

The number of homeowners who could lose their homes to foreclosure by the end of 2009 is estimated by some to be around 2.8 million. Under the legislation, 400,000 having trouble with payments could avoid it by trading their loans for new, more affordable mortgages.

According to the bill, banks would have to agree to allow the swap and to take a large loss in exchange for avoiding the lengthy and costly foreclosure process.

The legislation has two principal objectives: to offer affordable mortgages to homeowners at risk of foreclosure, and to bolster Fannie and Freddie with a temporary rescue plan and a new, more stringent regulator.

Helping at-risk borrowers
Provisions that will most directly affect consumers and communities include:

A larger role for the Federal Housing Administration. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances.

While the law authorizes up to $300 billion in loans, the CBO estimates that the agency is only likely to insure up to $68 billion and help keep roughly 325,000 people in their homes. Those estimates were based on the CBO's assessment of who is likely to qualify under the program and accounts for a certain number likely to default anyway.

A stronger regulator for the GSEs. The new regulator will have a greater say over how well funded the two government sponsored enterprises (GSEs) are - a major concern in the markets that has sent stocks in both companies plunging in the past two months.

A permanent increase in "conforming loan" limits. The law will permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,500 from $417,000.
The FHA maximum loan limits for high-cost areas would also increase to a maximum of $625,500. Higher loan limits will make it easier for borrowers to get mortgages, because those mortgages are more likely to be traded if they are considered conforming.

A new home-buyer credit. The new law includes a tax refund for first-time home buyers worth up to 10% of a home's purchase price but no more than $7,500.
The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.

A ban on down-payment assistance from sellers. The new law eliminates a program that has allowed sellers to provide down payment assistance for FHA loans.
The law would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.

A new affordable housing trust fund. The law establishes a permanent fund to promote affordable housing. The fund will be paid for by fees from Fannie and Freddie.

Grants to states to buy foreclosed properties. The law grants $4 billion to states to buy up and rehabilitate foreclosed properties. The White House has opposed such funding, contending that it will benefit lenders and not homeowners.

Bolster Fannie and Freddie. A late and controversial addition to the new housing law provides temporary authority for the Treasury to lend a financial hand to Fannie Mae and Freddie Mac if the Treasury deems it necessary to help stabilize markets.

Most importantly, Lenders or Servicers holding the homeowners original mortgage have to agree to rework a given loan.

The bill requires lenders to make major concessions including writing down the value of the loan balance and lowering the mortgage payment by reducing and fixing the interest rate.

As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis.

In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender.

So lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process.

Homeowners faced with this prospect, whether they are delinquent or not, should request professional assistance.

Homeowners are unlikely to get such a change if they don't ask, and they should make the investment required to make the case by seeking professional assistance.

The stakes are very high: your house and your credit.

In most cases, the decision on mortgage relief service is not made by the firm that owns the loan. It is made by a firm servicing the loan under contract to the owner. The owner could be a single lender, or it could be a group of investors who own pieces of a mortgage-backed security collateralized by a pool of loans.

Whoever owns the loan, the servicing firm is contractually obligated to find the solution to payment problems that will minimize loss to the owner. If the lowest-cost solution is a contract modification, that's great -- everyone involved prefers a modification instead of a foreclosure. But if a foreclosure would generate lower costs for the owner, the decision will be to foreclose. The cost of foreclosure to the borrower does not enter the decision.

Yet the decision is far from cut and dried, and it can be materially affected by whether and how the borrower presents his case.

That is why homeowners faced with this prospect, whether they are delinquent or not, should seek professional Mortgage Relief Assistance.