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 sub-prime 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 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 have long requested the ban, saying loans issued with down payment assistance carry a default rate three times higher than that of 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.
