Bailout Bill Has Big Implications For Housing

I wrote a post a few days ago discussing the possibility of adding Bankruptcy protection into the Financial Bailout Package that Congress is about to pass. Well the rough draft of that bill, the new "Emergency Economic Stabilization Act of 2008", has been released. Bankruptcy protection is no longer included, but there are some provisions with big implications for housing in the bill.

Lets take a look at this rough draft and see how it may play out:

Overview:
The goal of the Emergency Economic Stabilization Act of 2008 is for the Federal Government to step in and purchase troubled assets, mainly residential mortgage securities, from financial institutions in order to prevent disruption and provide stability to the U.S. and global economy.

Essentially, Uncle Sam is going to own (or insure) many of the failing mortgages in this country. And that is going to mean some changes in the way those failing mortgages are dealt with.

Sec. 109. Foreclosure Mitigation Efforts
The general premise behind the mitigation effort is to allow financially distressed homeowners to keep their homes:

the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

I interpret this paragraph as: We (the govt) now own your mortgage, Mr. Distressed Homeowner. We bought it for pennies on the dollar, and considering that, we intend to let you keep your home by modifying your loan. That is pretty confirmed on the next page:

the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications.

Wow! The government is leaving no stone unturned in this effort. Modifying terms of a mortgage (say adding missed payments on the back end of the loan) is fairly standard. Lowering a borrower's interest rate is becoming more generous. But the "creme de la creme" has to be principal write downs, allowing the loan amount to be reduced to reflect current market value.

Consider how someone might hit the trifecta:

Mr. Financially Distressed has a mortgage balance of $300,000 on an original loan of $310,000 at an 8% rate. He is in foreclosure and is 6 months behind on mortgage payments of $2175 (just P/I). And for good measure the home is currently worth only $260,000 now.

According to the proposed law, Mr. Homeowner may have those 6 missed payments forgiven ($13,050 benefit). He may receive a new loan with an interest rate of 6.25% with a new loan balance of…you guessed it…$260,000. So how is that going to impact his new monthly payment? Well that payment has been reduced from $2175 to $1600, a savings of $575 a month!

Also, included in this provision is protection for tenants who rent properties that are foreclosed on. Fair add on considering that tenants are unwitting victims and they raised a good deal of hell when the Housing Stimulus Bill was passed in July.

Sec. 110 Assistance To Homeowners
Now this provision confused me at first. It seemed like a repeat of Sec. 109. So I read it for a 2nd, 3rd, 4th time and then it hit me: those foreclosure prevention efforts that we discussed in Sec. 109, those are going to be the same rules for mortgages that the Feds don't own, but that they guarantee as the conservator for Fannie Mae and Freddie Mac. And they spell it out here:

In any case in which a Federal property manager is not the owner of a residential mortgage loan, but holds an interest in obligations or pools of obligations secured by residential mortgage loans, the Federal property manager shall— (1) encourageimplementation by the loan servicers of loan modifications developed under sub3 section (b); and (2) assist in facilitating any such modifications, to the extent possible.

Encourage? Like I encourage my 8 year old to go to school? I thought so.

Sec. 124 Hope For Homeowners Amendment
Hope for Homeowners was the part of the Housing Stimulus Bill in July that encouraged (there's that word again) lenders to allow loan balances to be reset to reflect current market value, and to refi that balance using an FHA loan. I was very skeptical of the program because it only encouraged and did not require lenders to work with distressed homeowners. My skeptisim has now disapeared. The changes include:

• Making the act proactive; anticipating income to debt ratio changes in the future due to loan resets: "or thereafter is likely to have, due to the terms of the mortgage being reset"
• Allowing the new loan to exceed 90% of appraised value: "or such higher percentage as the Board determines, in the discretion of the Board"
• Dealing with subordinate mortgages: Such actions may include making payments, which shall be accepted as payment in full of all indebtedness under the eligible mortgage, to any holder of an existing subordinate mortgage, in lieu of any future appreciation payments authorized under subparagraph". I'm not certain, but I think this eliminates future appreciation payments that were lynchpin of the HFH Act.

Sec. 303. Extension of exclusion of income from discharge of qualified principal
residence indebtedness.
This extends the moratorium on treating canceled debt as income and therefore taxable from Jan. 1, 2010 to Jan. 1, 2013.

As you can imagine from the tone of this post, I'm not thrilled with these proposed changes. The funny thing, though, is that they will probably benefit my business as a Realtor. I will layout my objections later today in another post, but I wanted to get you, my readers and clients, the gist of this proposed legislation PRIOR to it being passed.