Highlights Of Housing Bailout Bill

In an effort to curtail the housing and sub-prime mortgage crisis sweeping the U.S., President Bush today signed into law the American Housing Rescue and Foreclosure Prevention Act of 2008 (H.R. 322) (the "Housing Bill").

The Housing Bill, which is widely regarded as the most significant housing legislation to pass in decades, would provide various forms of assistance to troubled homeowners and first time home buyers along with troubled mortgage companies Fannie Mae and Freddie Mac.

Defaulting Homeowner Relief
The Housing Bill aims to provide mortgage refinancing assistance to homeowners by permitting them to refinance into a lower-cost FHA insured mortgage that they can afford to repay. Participation in the program by the homeowner's existing lender is voluntary. Amongst other things, the Housing Bill would make some homeowners eligible to cancel their existing mortgage loans originated on or before January 1, 2008 and replace them with new fixed rate loans with terms of at least 30 years. The defaulting homeowner would have to prove that the reason for the default under their original loan was not willful The amount of the new loan would be no more than 90% of the value of the mortgaged property, which must be the borrower's primary residence. Borrowers who take out new loans under this provision would not be able to take out a home equity loan for at least 5 years, and the mortgagor's total debt-to-income ratio could not exceed 31%. The FHA is permitted to insure $300 billion in such new mortgages. In approving this program, Congress has set aside $180 million for financial counseling and legal assistance to assist homeowners to remain in their homes.

First Time Homeowner Tax Breaks|
The Housing Bill also provides certain tax breaks for first time home buyers. Specifically, these buyers will be eligible for a federal tax credit of $7,500 or 10% of the purchase price, whichever is smaller. This tax break, however, is more akin to an interest-free loan and is not a true tax credit. The homeowner would have to pay the credit back in equal installments over 15 years. The tax credit is retroactive to purchases made on April 9, 2008 and expires on July 1, 2009.

Bailout of Fannie Mae and Freddie Mac
The Housing Bill attempts to re-invigorate the housing mortgage market by permitting the Treasury Department to increase Fannie Mae and Freddie Mac's line of credit. The Housing Bill gives Fannie Mae and Freddie Mac permanent authority to purchase loans up to 115% of the local median home price in areas with high housing costs. Neither Fannie Mae nor Freddie Mac, however, will be permitted to purchase loans larger than $625,000, an increase in the jumbo loan amount. The Treasury Department also gains unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or to purchase their stock.

Emergency Community Relief
Additionally, the Housing Bill provides for approximately $4 billion in emergency assistance to communities which have been affected the hardest by the waves of foreclosures. This pool of money is to be used to purchase foreclosed homes, at a discount, and rehabilitate or redevelop the homes to stabilize the neighborhoods.

In order to prevent future abuses and crises, the Housing Bill proposes to establish a nationwide loan originator licensing and registration system that will set minimum standards for loan originator licensing. This measure would substantially improve the oversight of mortgage brokers and bank loan officers.

While the housing and mortgage market continues to be in substantial flux, only time will tell whether the provisions of the Housing Bill will operate to alleviate the crisis as Congress hopes. Careful due diligence of loan portfolios and scrutinized underwriting procedures will continue to be the rule until the market steadies itself and the growing influx of litigation tapers off.