The Housing and Economic Recovery Act of 2008, signed into law by President
Bush on July 30, has sparked numerous debates over its mechanisms to assist
struggling homeowners, future homebuyers and lending institutions. However, some
of the complex law's nuances are poorly understood, and certain provisions have
received only a passing mention in news reports. In an effort to better explain
the law, here are five key questions and answers:
Question: Why does the housing act offer unlimited credit to Fannie
Mae and Freddie Mac?
Answer: The law's most far-reaching provision gives financial
assistance to the government-sponsored Federal National Mortgage Association and
Federal Home Loan Mortgage Association, which own or insure nearly half of the
roughly $12 trillion in U.S. mortgage debt. Fannie Mae and its younger brother
Freddie Mac have suffered losses totaling about $11 billion in recent months,
due in large part to their investments in financially risky subprime loans. Both
associations purchase loans from lenders and sell them as mortgage-backed
securities to the global investment market.
The housing act allows the U.S. Treasury to offer Fannie Mae and Freddie Mac
an unlimited line of credit until the end of 2009, and it can also buy their
stock. The hope is that a federal guarantee will bring gun-shy investors back to
the secondary market, which provides the funding for lenders to make future
loans.
Q: Which homeowners are eligible for Federal Housing Administration
refinancing of their existing mortgage loans?
A: To qualify, a borrower must live in the home, cannot own any other
property and must have a high mortgage debt-to-income ratio - most likely 31
percent or more, though there may be exceptions. Applicants also must agree to
forfeit no less than 50 percent of the home's future appreciation. They lose
even more - up to 100 percent - if they sell within one to five years. FHA must
consider the applicant's debt-to-equity ratio, which means borrowers who are
significantly upside-down would not likely qualify. The borrower must provide
tax returns for the past two years to prove adequate income and must not have
any fraud convictions in the past 10 years.
Possibly the most significant hurdle is that lenders are not obligated to
accept the refinancing plan. Also, there is a $300 billion limit on the cost of
insuring all refinanced loans.
Q: What are the terms and conditions of the new $7,500 homebuyer tax
credit created under the law?
A: Most importantly, the tax credit is in the form of an interest-free
loan and is not a gift or grant. The borrower must repay it within 15 years of
purchasing the home. Only first-time homebuyers are eligible, and the tax break
only applies to homes purchased between April 9, 2008, and July 1, 2009.
The tax credit's full amount is only available to individual borrowers whose
annual income is below $75,000 and couples with a combined income below
$150,000.
Q: How does the new law affect reverse mortgages?
A: The housing act will have a significant effect on the issuance of
home-equity conversion mortgages, also known as reverse mortgages. Proponents of
reverse mortgages, which allow homeowners age 62 or older to liquidate their
home's equity over time by deeding the home to a bank upon their death, say the
law makes them safer and more accessible than in the past.
The law requires reverse-mortgage borrowers to receive "adequate counseling"
from a third party not associated with the lender, and it allows the government
to create a new counseling program funded by mortgage insurance premiums. It
also reduces possible conflicts of interest by forbidding reverse-mortgage loan
originators from selling insurance, annuities or other financial products. They
may not give or receive incentives from others to sell such products to reverse
mortgage borrowers. The law also places a $6,000 cap on origination fees, which
will be adjusted periodically for inflation.
Q: What other provisions are included in the bill?
A: One provision that has received some attention is the elimination
of seller-funded down-payment-assistance programs for FHA borrowers, which takes
effect Oct. 1. The ban will virtually eliminate no-down-payment offers on new
homes. FHA officials requested the ban, saying loans issued with down-payment
assistance carry a default rate three times higher than traditional FHA loans.
The housing act also places a one-year moratorium on "risk-based" FHA loan
insurance premiums, a program initiated in July to charge borrowers based on the
likelihood of loan repayment. It streamlines the process for issuing FHA-insured
loans on condominiums and reforms the FHA loan process for manufactured homes.
In addition, it authorizes a pilot program to generate alternative credit
rating information for loan applicants with insufficient credit history.
