Understanding the American Housing Rescue and Foreclosure Prevention Act of 2008

The U.S. House of Representatives passed H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008. The bill includes a temporary, $7,500 first-time home buyer tax credit which many believe will jump start the housing market and bring buyers off the sidelines. President Bush has since signed this bill into law.

Kieran P. Quinn, CMB, Chairman of the Mortgage Bankers Association (MBA) hailed the House of Representatives passage of the omnibus housing bill. The bill, which passed the House by a vote of 272-152, will now go to the Senate – where leaders have indicated it will pass – and then to President Bush, who has stated he will sign it.

Among the provisions in the bill:

FHA Modernization: Authorizes a $25 million appropriation to improve technology, processes, program performance, eliminate fraud and provide appropriate staffing. Effective January 1, 2009, it also increases the FHA loan limit to the lesser of 115 percent of the local median home price or $625,500 with a floor for lower priced markets of $271,000, establishes a 12-month stay on FHA’s proposal for risk-based premiums, sets the down payment requirement at 3.5 percent and prohibits seller-funded down payment assistance (both direct or through a third party). In my opinion: This means today’s buyer will have to have his “skin in the game” and not rely solely on outside sources for his/her downpayment. This is how purchasing a home used to be and should always be as buyers who actually have their hard-earned money invested in their home will be more likely to pay their mortages and stay in their home than just walk away and leave the property to foreclosure.

GSE Oversight Reform: Creates a new regulator (five-year term, appointed by the President, confirmed by the Senate) with oversight authority similar bank regulators, establishes a new affordable housing fund and capital magnet fund to be funded by a 4.2 basis point fee on all new loans, significantly changes the affordable housing goals and raises the conforming loan limit to the higher of $417,000 or 115 percent of the local median home price, not to exceed $625,500 (the stimulus limits remain in effect until January 1, 2009). In my opinion: This will allow buyers in very expensive markets to find competitive loans as many Jumbo Loans (non-conforming loans over the loan limit) come with higher interest rates and are an unfair punishment for purchasing in a high dollar area).

FHA Rescue: Creates a voluntary program for lenders to write down the loan balance in exchange for an FHA guaranteed loan not to exceed 90 percent of the newly appraised value of home. The lender would pay a 3 percent FHA loan origination fee. To qualify, the borrower must have a debt-to-income ratio above 31 percent on the original loan. The program is capped at $300 billion. In my opinion: This will help keep many homes off the foreclosure chopping block and will have a positive affect on surrounding properties and homeowners.

Tax Incentives: Creates a $7,500 refundable tax credit for first-time home buyers, expands the volume cap for the low income housing tax credit, allows for tax-exempt treatment of bonds guaranteed by the Federal Home Loan Banks and exempts the low income housing tax credit from the alternative minimum tax. In my opinion: This is a fairly low cost incentive to help first time home owners enter the market.

Low Income and Affordable Housing: Encourages the development of low-income and affordable housing by harmonizing multi-family FHA mortgage insurance programs with the low income housing tax credit. Allowing these two programs to work together will result in more effective uses of both programs. In my opinion: Again, another low cost incentive for affordable housing.

GSE Backstop: Authorizes the Treasury Secretary to temporarily increase the GSEs’ line of credit and to, if necessary, buy equity in the GSEs in order to provide confidence to credit markets. Also provides a role for Treasury and the Federal Reserve in GSE oversight to ensure safety and soundness. In my opinion: Yes, another bail out but one that is necessary to our Nation – much like the airline industry bailout of years’ past.

TILA Reform: Requires TILA disclosures to be delivered seven days prior to loan origination, requires that disclosures include examples of how payments would change based on rate adjustments in addition to disclosing the maximum possible payment under the loan terms and mandates that the consumer receive early disclosures before paying anything more than a nominal fee that covers the cost of a credit report. In my opinion: Disclosures that should have already been required so that the lending vehicle is transparent to the prospective buyer. I have seen too many buyers that were blindsided by the costs of rising interest rates during the transaction as well as dealing with punitive pre-payment penalties after the sale. Education is never a bad thing and this mandated disclosure will be helpful to the general public.

Empowering States: Raises the cap by $11 billion on tax-free bonds that state housing finance agencies may use to help at-risk homeowners by refinancing troubled loans and appropriates $4 billion for states to purchase and renovate abandoned and foreclosed properties. In my opinion: Again, a good way to help keep homes out of foreclosure.

Licensing: Encourages state officials to create a national licensing system for residential loan originators, allows HUD to create a licensing system for those states that fail to enact their own, establishes minimum qualifications for all loan originators and requires federal regulators to create a registry for banks and thrift employees who originate loans. In my opinion: loan originators are poorly regulated and are certainly part of the problem that should be addressed. By mandating a minium qualification standard and licensing, perhaps this can be resolved. I personally am not allowed by my brokerage firm to originate loans for my clients. This could certainly be a source of conflict of interest and we choose to eliminate that from the transaction. I would suggest that buyers may wish to deal with a loan originator who does this full time rather than someone trying to handle all aspects of the real estate transaction.

All in all, this bill has good, strong point that should positively affect the current housing market and the economy as a whole. While I agree that no private industry should be “bailed out” when their bad practices have lead to ruin, this is an issue that goes beyond private industry. The secondary mortgage market is necessary to us all and we need to make sure we do everything we can to keep it healthy.

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33 Responses to Understanding the American Housing Rescue and Foreclosure Prevention Act of 2008

  1. Loans News Aggregator » Understanding the American Housing Rescue and Foreclosure … says:

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  4. Ben deIpolyi says:

    I read that the start date for first time home purchases is early April 2008. Any chance that the date will wind up as January 1? My sonb was a first time buyer in February.

  5. christiborden says:

    Great question. I do not have the answer to that but will follow up for you. Thank you for responding. I wish your son well with his new home. Homeownership is the beginning foundation for financial independence.

  6. todd says:

    I have a question. In doing some research it appears that you have to have a mortgage to debt ratio greater the 35% to qualify for having the loan principle adjusted to the 85% of the actual value of the property. I live in south florida and my property has dropped over 60% in value since I purchased in march of 2006. At the time I purchased the home we were above a debt to income ratio of 35% (and still are) altho a good portion of that debt is unsecured credit cards. We have been steadily paying off our cards but are still 2 years out from being debt free. It seems by the reading of the requirements to write down the loan principle, we are being punished for buying a home that we can afford when compared to those that took advangtage of the interest only loans. Is there anything we can do to qualify for the loan principle write off? My wife and I are considering forclosing on the house due to a bad housing choice (it was our first home) because it will take MANY years 10-20 before we could recap the 120k that our house value has dropped. (bought at 214k, now worth 85-90k).

  7. Sheila says:

    Very interesting. Thanks for posting about it. It seems that the housing market in Katy continues to be healthy. Just last week two people that I met at the park had recently bought homes in Katy Proper and both purchased the homes BEFORE they went on the market. They both said it was difficult to find a home in the Katy Elementary zone that was “decent”.

    With all the new subdivisions popping up and the present ones growing, it seems hard to believe that the housing market here has suffered. But, you are in the business and would know better. What do you think from your viewpoint?

  8. christiborden says:

    Hi Todd,

    I certainly can understand your frustration. I would speak to your lender about the FHA rescue, once the bill is formally passed. (I am speaking of your lender not the loan originator – Your lender is who you send your checks to monthly).

    Now, some lenders will be reluctant to move forward on this as they are required to pay 3% up front and will have to write down debt that will never be collected. So you should be persistent and patient. I agree that those who took advantage of the wildest loan vehicles (interest only, 40-60 year terms, negative amortization, balloon payments, etc.) will also benefit. In my opinion, the majority are no better than speculators and a huge percentage of all foreclosures this past year were buyers who “gambled” on a significant increase in appreciation in order to pay their note. This is no different than if I went over to your Seminole HardRock Casino and put down $ 200K on the blackjack table in the hopes that it will turn into 300K so I can pay of my loan shark. Then, when I lost the money, I exclaimed, “it’s not fair…” and would now want someone to bail me out or forgive my debt. This is not who the Bill is intended to rescue but many will fall within the requirements and receive relief – deserving or not.

    Florida, California, Arizona and Nevada saw the worst of the speculators and I have a hard time feeling sorry for them, as you do. But the Bill does not discriminate so many of them will be “rescued” as well as buyers’ like yourself who simply bought at the top end of a market that would soon correct itself (normalize is another word we use),

    I applaud that you are tyring to pay down your debt and would advise you to speak to your attorney or financial advisor before heading toward foreclosure – what I see as a last resort effort. If you have had a life changing event (illness, divorce, loss of job, etc,) where you simply cannot manage the home, then that might be your only option. But if you are looking at equity lost, remember that what goes down will also eventually go up. Be patient, pay down your principle debt over and above your monthly mortgage note (even 10$ a month is signitificant), keeping paying off your credit card debt, and remember that you live in a wonderful, vibrant area that will appreciate once again. There are many economists who feel that your area is already at bottom and will be heading back toward a healthy market. It most likely will not be at the high point of 2006 soon but certainly will not remain at the bottom you are experiencing now. Good luck to you and keep in touch with me,

  9. christiborden says:

    Hello Sheila,

    Yes, Katy and Houston as a whole have weathered this “storm” better than most areas of the country. There are several reasons for this:

    Reasonable Appreciation: While the East and West Coasts were basically “drunk” with unreasonable and unsustainable appreciation, our area has always had a positive but narrow appreciation of between 3 and 10%, with an average of 4 – 6% most years. 2007 was the strongest year for South Katy – areas in the Katy School District south of Interstate 10). The North Katy market is a different story only because the builders have created so much inventory that it has negatively affected resale homes and so their appreciation has been less than that of South Katy.

    Job Growth: Houston and the surrounding areas has always had almost double the job growth of the National average. While the petroleum industry is still very important, we have also diversified into many other fields to help protect us from a 1980’s type “bust”.

    Medical Services: Look around you and you will see a new hospital or medical professional building in the works. Katy is looking to be the Med Center West and we will all benefit from the growth.

    Construction and Land Costs: Builders in our area sell homes on a cost basis plus a narrow built-in profit margin versus those in speculative areas such as Nevada and Arizona – where the builder propped up the prices dramatically above construction costs speculating that the buyer would pay – and they did with less than solid loan vehicles that how now lead to HUGE foreclosure ratios in those areas.

    So, now to Katy. Yes, Katy is still very strong. Are we where we were this time last year? No. Housing prices increased in some neighborhoods up to 12% from 2006 to 2007 and we did not see that jump to 2008. We are back to our 4 – 6% appreciation but some sellers are having a hard time realizing that they cannot expect the amazing growth that was experienced last year. Also, buyers today are heavily influenced by the media and are frankly scared of making a move. The media is controlled by two forces, financial and political, and neither one will allow for postiive news to reach its audience. As long as buyer confidence is too low and seller confidence is too high, we will see homes sit on the market longer and see more price reductions. That said, the Katy and the Houston area have been voted the number one place to live by Forbes and other sources so we should continue to see a strong and healthy real estate market in our area.

    Thank you for your post and have a terrific day.

  10. Matt D says:

    Hey christi, had been following HR 3221 as it developed over the past few months. had a question regarding the provision that expands FHA guarantees by 300 billion.

    Will lenders have an incentive to voluntarily enter the program with the write-down? does teh 4 billion appropriation undermine that incentive at all?

    thanks!

  11. Ron says:

    This is all a huge scam to bail out the Wells Fargo, Bank Of America aka Country Wide and other scam artist that screwed up the industry.

  12. robert says:

    Todd:

    The unspoken premise here is that this bill is a bailout for banks and Wall Street.

    The higher the DTI, the riskier the borrower.

    By putting a floor under the DTI, the investors are able to liquidate the riskiest loans in their pools/portfolios, and transfer that risk to the FHA insurance fund.

    These are loans that they would have to sell for a significantly lower price to investors who would be interested in buying them.

    This way, they’re able to liquidate their lowest-quality loans without having to sacrifice the “good” loans which are being paid by borrowers with lower risk profiles.

  13. christiborden says:

    Robert,

    You are correct, this is a bailout but is one that will bolster our secondary mortgage market and lending industry at a crucial time with regard to our economy woes. We could argue all day whether it is “fair” to taxpayers to bear the burden of yet again another bailout of a private industry but in the end, this bill will help many families in need at this time. With stronger lending quidelines and hopefully more oversight of the lending industry, we will not find ourselves in this position again.

    There are many people to blame for this mess and it starts at Wall Street and goes all the way down to the consumer. Wall Street started looking at the secondary mortage market as a “sure bet” without really investigating the mortages that were involved. In fact, they actually knew in advance of the volatility of the investments but did nothing. The banks were lending out money left and right without any regard on whether the consumer could actually pay them back. The loan originators are loosely regulated and were getting paid back-end bonuses or additional premiums for selling loans to consumers above the available interest rates (sometimes making $ thousands more than the orginal fee). Professional appraisers were getting paid to appraise homes at the sales price regardless of actual market value. Real estate practioners were getting bonuses from builders to move their properties when not in the best interest of their clients or worse, were handling the loan origination as well (conflict of interest, if you ask me). And yes, too many consumers were getting loans for properties that they speculated or gambled on greatly appreciating in value in order to refinance the loan quickly so they could pay the notes or that they simply could not afford in the first place.

    So… where do we go from here? Always, times of great economic expansion are followed by short periods of retraction and that is what is happening now. The real estate industry as a whole has bolstered the US economy for the last 5 years or so and now it is time for a slight retraction and correction – much like stock market experienced after the dot.com debacle.

    Whether you agree with it or not, the House Bill 3221 has passed. I will publish more about this Bill tomorrow to help you better understand the ramifications of the rescue to consumers. This is no FREE RIDE.

    http://www.ChristiBorden.com

  14. Amy L says:

    First time homebuyer is defined as not owned a home for three years. If a chapter 7 which included a foreclosure was filed in May 2006 and discharged August 2006 would I still qualify for the 7500 tax credit if I bought a home this coming year?

  15. COSTA DEL SOL PROPERTY FOR SALE says:

    kind information. i really appreciate it.

    thanks a lot

  16. Acomplia says:

    Lovely post. Please add my email address to your list and email me the updates if possible. I always like to read your blog and comment on it.

  17. Carin says:

    Hello Mrs. Borden,

    I truely hope that you can answer my question. I live in the San Joaquin Valley. I have a 1st/2nd mortgage (the second is with Countrywide). My 1st loan is a FHA adjustable loan. I purchased my home in 2002 and it is a single family home. Providing the mortgage to debt ratio is 35% or higher, should I qualify for the relief program? Does lates lower my chances? I have been late for July and most likely August too. I’m trying to prevent Foreclosure. I’m really worried. What can i do?

  18. christiborden says:

    Hi Carin,

    I believe you should qualify but you absolutely must talk to your lender before you add up more late payments as this may, indeed, affect your chances to qualify. Remember, that your lender(s) must decide whether they intend to participate as they will have upfront expenses for the refianance. Of course if the alternative is foreclosure, one would hope that they would choose the less expensive course. But, unfortunately, we can never predict what they will do in each instance. As a reminder, you will be required to share at least half of any profits made should you sell the property within a defined time frame (all of the profits within the first year). As I mentioned, this is not FREE, nor should it be.

    You did not mention your sales price of the home and the market value today. This is a large factor in determining if you would qualify. Again, talk to your lender today regarding this program and thank you for stopping by my blog. I wish you the very best and feel that many markets, like your own, are going to begin improving within the next year so hang on there!

  19. christiborden says:

    Amy,

    Sorry for the delay but even Realtors take a holiday every now and then.

    Yes, it is my understanding that if your bankrupcy was dicharged (not dismissed) and the time lapse from the end of ownership to new purchase is a minimum of three years to the day, then you should qualify. Again, check with your accountant to confirm or go directly to http://www.irs.gov to clarify this for you. Remember, this is merely a no-interest loan that the government is making to you as an incentive to purchase a home at this time. You will be required to pay this back through increased taxes yearly for a defined time period. If you feel that you may not be able to pay this back in the future, you may wish to rethink taking advantage of this exemption. However, if you wish to use this money to pay down debt on credit cards, etc. this may be a wonderful way to move ahead. Good luck to you and thank you for contributing.

  20. Carin says:

    Hello Again Mrs. Borden,

    Thank you for answering my questions. My home WAS valued at $419K, and now I believe it’s at $275K. I owe at least $250K if not slightly more. I called my mortgage company and I was told by someone (who wasn’t fully aware of WHAT all the requirments of this law is) that since I have an FHA loan that I don’t qualify…is this true?

  21. christiborden says:

    Carin,

    I was not aware that your lender would be prohibited and am trying to investigate this further for you. I do not recall any such prohibition but I will have official information on this very subject as soon as possible and welcome any comments from visitors on this subject.

  22. carlos says:

    Hello christiborden

    How do you get this credit?
    What is the process to get it?

    Thank you

  23. christiborden says:

    Hi Carlos,

    This is the best part. Participating in the tax credit program is so easy. You simply claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests. If audited, you will need to provide the HUD 1 Settlement Statement from the sale of your last home (if applicable) to show that you are indeed considered a first time home buyer under the guidelines. You will also need to present the HUD 1 Settlement Statement from the sale of your present home or your planned purchase, to show that the home purchase fell within the proper time frame and that your credit is correct in relation to the sales price.

    For an indepth look at the Federal Housing Credit, please visit http://www.federalhousingtaxcredit.com/index.html to make sure that you qualify. Good luck to you and thank you for contributing to this discussion.

    http://www.ChristiBorden.com

  24. Carin says:

    Hello again Christiborden, did you ever find out any further information on my problem? I’m just curious about exactly what is out there as an option for me since the passing of this new relief fund.

  25. christiborden says:

    Hi Carin,

    It is my understanding of this relief process that the intent was to allow those buyers with non-conforming, risky loan vehicles to convert to a FHA loan so that they could avoid foreclosure. So your FHA loan most likely will not be eligible for this conversion as you already have a safe loan vehicle. If anyone out there has more information on this, I would appreciate it.

    I think you stated that you bought your home when the market was high and now the value is equal to or less than you owe on your home, is that correct? If so, you may wish to speak to your lender (not loan officer who first wrote your loan but the bank or lender that carries your note) to see if there is a way to extend your payments or to lower your payments so that you can remain in your home until the market corrects itself (several years or so) so that you will have built up enough equity to sell your home and walk away without the prospect of foreclosure.

    Another avenue would be a short sale. This is where you have a buyer who presents a fair offer that is less than what you owe but that the bank may consider (and forgive the remaining indebtedness) to avoid your going into foreclosure. This is a timely process where the bank has to get a second Broker Opinion of value and you have to present 2 years tax returns, 2 months pay statements, 2 months mortgage statements and a letter stating the hardship that has led you to this point. This process is not approved for everyone as there indeed must be a hardship such as loss of job, catastrophic health issues, etc. but it is something that you may wish to consider as a possible option,

    While there are many people that have no choice but to walk away and let the bank “take” their home, far too many people use foreclosure as an excuse to walk away when they could have, in fact, hung on a few more years and avoided this stain on their credit. Foreclosure should always be a last resort.

    Thanks for writing again and I wish for you a terrific weekend.

  26. unhappy home buyer says:

    Does anyone know who or where i can write to in regards to the 2008 “Tax Credit” or interest free loan of $7500. I don’t fell that it is fair that in 2009 people would get $8000 “Tax Credit” that they DON’T have to pay back. I feel that we should be allowed to keed the money without paying it back, or that those in 2009 should have to pay thiers back as well. Those of us who purchased a home last year helped the economy as much as those who purchased in 2009. If anyone has info please e-mail me at KJS7654@cox.net Thank you!!!

    • christiborden says:

      I agree with you but I do not know if the government will revise their plans. It would be a good idea to email your legislator about this and perhaps get together a petition of those buyers that fell under the 2008 tax credit plan that is required to be paid back. We are also hoping that the government will extend the present plan set to expire at the end of November. If anyone wishes to chime in on thoughts about this, I would welcome your comments.

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  30. ForeclosurePrevention says:

    My name is Charles, I found your blog doing a quick internet search. I wish I could have said the same. I live in Philadelphia, and I have worked with many homowners who were facing foreclosure and the number is only growing. We started a new social networking site, http://www.HomeLeafs.com that helps address foreclosure issue that I believe you would be interested in and hopefully can share to your readers. Can you check out the site (semi-private beta), and/or send me an email to the address I provided? Thanks! Would love to chat!

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