08/27/08

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Getting help from the feds

Democrat and Republican leaders in the House of Representatives and the administration have listened – and although the Senate is not on board yet, Senate Majority Leader Harry Reid says he wants a vote on a proposed stimulus package by Feb. 14.

The stimulus plan includes cash for most earners, but also directly addresses the housing credit crunch. It dramatically increases the size of mortgages that can be backed by Fannie Mae and Freddie Mac in high-cost areas, from $417,000 to as much as $729,750. Fannie and Freddie have taken on a larger portion of the securitization market since the credit crisis.

"Obviously, we are very excited," said Jamie Gregory, Deputy Chief Lobbyist, of the National Association of Realtors.

Mark Zandi, chief economist at Moody's Economy.com, believes a recession can be avoided since the Federal Reserve is aggressively cutting interest rates, as long as this package passes on the schedule laid out.

Although Congress only started acting fast in 2008, it did respond to the subprime and foreclosure mess in 2007. Last year, federal legislators passed a change to the tax code that penalizes people who convinced their lenders to do a short sale. Before the change, the difference between the mortgage balance and the sales price– on average, 16 percent– was taxed as income. Some who lost their houses due to foreclosure also found themselves owing taxes on the forgiven debt.

Congressional researchers estimate 400,000 people will be spared a tax bill because of the tax code change.

Both the House and Senate passed a bill last year to change some of the rules for Federal Housing Administration insurance. The FHA has been a central player in responding to stressed borrowers who were sold adjustable 2/28 and 3/27 loans that were unaffordable after the first or second interest rate increase.

The FHA Secure program, which helps borrowers refinance into 30-year fixed rate loans, has moved more than 64,000 people out of their subprime loans.

"We're on track to help more than 300,000 by the end of the calendar year," said FHA spokesman Steve O'Halloran. About 75 percent of applicants are approved. On average, the fixed rate mortgage saves the borrower $400 a month.

The FHA Secure program allows borrowers with one or two missed payments the opportunity to refinance. But it cannot serve homeowners who don't have at least 3 percent equity in their homes. And the FHA has a $362,000 ceiling on the size of mortgage it can insure.

The stimulus package also rolls up this bill, and the outlines of the package, before the Senate weighed in, would mean the FHA, too, could go to $729,750 in the most expensive markets.

"We're going to be working very hard to retain it in the Senate," Gregory said. "We're hoping it's going to look really close to what we've seen announced so far."

O'Halloran said if the limit is increased to $417,000 outside the costliest areas, "it allows us to help 250,000 more people. We've been asking for this bill for two years. Given what these families are facing out there, the urgency couldn't be higher."

Gregory agreed. "Time is of the essence. The sooner they enact it, the sooner it will have positive impact on the housing market and positive impact on the overall economy."

While part of the housing market decline is due to buyers' belief that prices are still too high, some of the slowdown is because mortgages have become more difficult to get for people with small or no down payments, for people with damaged credit, and for people needing jumbo mortgages.

Helping more people in more expensive markets— like South Florida— get refinancing, or buy houses, matters, he said.

"In the markets that are doing the worst – California, Las Vegas, Florida," he said, many houses cost too much to qualify.

It's too soon to know if private industry's answer to subprime defaults will change the trend line of ever-higher numbers of delinquencies. The U.S. Treasury Department negotiated the deal, which is supposed to accelerate loan workouts for some borrowers, giving them a five-year rate freeze if lenders determine they can afford the house at the original interest rate, but believe they cannot readily refinance out of the subprime loan about to adjust out of reach.

In case that plan is ineffective, House and Senate members have introduced bills that would give bankruptcy judges the authority to force lenders to change the terms of mortgages for borrowers in Chapter 13 bankruptcy repayment plans. The Senate had a hearing on the idea, with some interest – and some wariness – from the Republican co-chairman of the Judiciary Committee, Sen. Arlen Specter, R-Pa.

Zandi, the economist, testified at that hearing. He said short of a government bailout, similar to what happened in the Savings and Loan crisis, this is the best way to stop the wave of foreclosures.

He believes the idea could become law. "I wouldn't write it off," he said.

Zandi thinks legislation to regulate future subprime lending is more likely to pass this year, however. A bill has already passed the House with bipartisan support. All of Miami-Dade's delegation voted for it– Rep. Lincoln Diaz-Balart, Rep. Ileana Ros-Lehtinen, Rep. Kendrick Meek, Rep. Mario Diaz-Balart, Rep. Alcee Hastings, and Rep. Debbie Wasserman Schultz.

The American Bankers Association opposes the Senate bill, introduced by Dodd in December.

The chief lobbyist, Floyd Stoner, said in a statement: "We believe that this legislation, as written, would further restrict credit at a dangerous time in the market cycle."

The bill had no Republican co-sponsors at introduction, and in the Senate, no bill can go anywhere without some Republican support. A spokesman for Sen. Richard Shelby, RAla., was noncommittal when asked about the bill. "We're currently reviewing the proposal," said Jonathan Graffeo. "As always, the senator will work with the chairman where possible."

Both the Senate and House bills would end the practice of writing loans without evaluating the borrower's ability to repay after the interest rate increases. They would also likely mean the end of 2/28s and 3/27s in the subprime market, though seven year ARMs would not be discouraged.

Zandi said, "I would be surprised if something like that doesn't become law. There is a significant desire to be able to do something."