Housing Bill Says, "Lemme Eat Your Baby's Upside"

The Senate approved the over 700 page new housing bill and it will soon be signed by President Bush.  In the same way that every cloud has a silver lining, every ray of light can also bring you cancer, so we expect the bill to be much more than meets the eye, and do much less for those most desperate. In other words, for those currently in deep underwater on their loans, this bill probably is not going to help in the way they want to be helped.  Nobody is going to come handing a refinanced loan and payment without any strings.  Wouldn't be prudent, not gonna happen.  So someone's Pinnochio, the homeowner will remain.  Perhaps wisely, the freebies are not entirely free.

The centerpiece of revelance to the homeowner is the $300 billion insurance fund that the FHA can use to help people refinance their mortgages.  CNN reports:

The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes' current appraised value.

But the amount of help available certainly won't extend to every homeowner in distress, given the qualifications that must be met to gain assistance. These include: living in your home; having purchased it been 2005 and 2007; spending 31% of gross monthly income on housing; proving you are unable to pay current mortgage; having an ability to pay new mortgage; retiring any home equity or lines of credit before getting new loan and not being able to take out any such lines for 5 years. 

Because this is all voluntary on the part of the lender, one cannot be certain that any of this will happen in a swift and timely manner for the homeowner, if at all.  The provisions certainly seem to reduce the risk to taxpayers, which is probably the better long term good.  Certain fees are built into the new loans to cover costs of the bailout, including a 1.5% insurance fee paid to the FHA annually, plus an exit fee of 3% upon getting rid of the home.  

What seems particularly hard hitting is the loss of upside, with the homeowner giving up 100% of any gain if they sell in the next year, and with that number dropping to 50% of the gain in five years.  Half your upside is taken for the rest of the life of the loan. Yay (for the taxpayer).

Of course there are other components that could be quite bad for the taxpayer, including the raising of the debt ceiling to cover some of these initiatives and the Treasuries new temporary power (expiring in 18 months or so) to loan money or buy equity to Fannie and Freddie.  There is $4 billion to allow states to buy up foreclosed properties, an idea whose time probably should not come. There is the raising of the cap on mortgages that Freddie and Fannie can handle to approximately  $625,000 (from $417,000), which might not be good, since the two quasi government arms had trouble with what is currently on the plate. 

The more important changes were made earlier in the month when the Fed imposed new rules for mortgage lenders which would have prevented the necessity of this current bailout; those rules take effect October 1, 2009 and include things like people having to have income to buy a home. 

It just seems unclear to us whether those really in trouble will be able to capitalize on the help, since the type of person in trouble is probably not the type of person to be particularly detail oriented.  In our mind that increases the likelihood of Freddie and Fannie taking major losses that might require Treasury action.