It is called the Hope For Homeowners Act of 2008, but the question is will it provide any more hope than the government’s prior failed attempts to help people that are losing their homes?
What Is In The New Law?
1. A Bail out Of Fannie Mae and Freddie Mac
About 50% of all mortgage loans are ultimately funded in the secondary market by Fannie Mae and Freddie Mac. These organizations are not government entities, but operate under close government supervision. They are referred to as GSE’s (government sponsored entities), which means that the U.S. government is standing in the wings to prop them up if and when needed. Without Fannie and Freddie, money for mortgages in the United States would quickly dry up. Yes, things can get even worse than they are now for people trying to find a mortgage. The new law provides that the Treasury Department can make available an unlimited line of credit to Freddie and Fannie over the next 18 months. It also authorizes Treasury to buy stock in either enterprise or take whatever other measures are necessary to provide financial support.
2. An Opportunity For Troubled Homeowners To Get A New Fixed Rate Mortgage
The law authorizes FHA to guarantee up to 300 billion in loans over a three year period. The new loans will be for up to 90% of a home’s current value. In order for you to be approved for a new FHA loan under this program, your lender must go along with it. This is because the most that FHA will guarantee is 90% of the home’s current value. Your lender will have to write off the difference. This may sound unlikely, but many lenders are now willing to take what they can get and have become far more flexible in recent months as the housing crisis has worsened. Eligible borrowers must have spent more than 31 percent of their monthly incomes on their mortgages as of March 1, 2008. The troubled loan must have originated no later than Jan. 1, 2008, and be on the borrower's primary residence. And the borrower's income must be verified. (Here we go again with a laundry list of restrictions that will only narrow who can get assistance from this program).
3. Tax Refund Of Up To $7,500 For First Time Homebuyers
First time homebuyers will be eligible to receive a tax credit of up to 10% of a home’s purchase price with a maximum of $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.
4. Other Provisions
Formation of an affordable housing trust fund
Grants to states to buy foreclosed properties
Increase Freddie and Fannie lending limits to $625,500
The jury is out and whether this plan will do the trick. I really think there is much more to be done and ultimately the government will have to step in and provide loans or loan guarantees to a much wider group of homeowners with far less restrictions as the foreclosure crisis worsens. The most disappointing part of the equation here is that once again the success or failure of the heart of this plan seems to have been left in the hands of lenders to decide if they will allow borrowers to get into a new FHA loan. This seems like a very high stakes game of chicken between the government and mortgage lenders. Will lenders let borrowers get out of their loans at 90% of the current value? I just don’t know and that is the real key to whether all of this will end up being another failed attempt at solving the problem.
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