Last Wednesday, President Bush signed into law a housing bill in an attempt to boost the struggling housing market and bolster finance giants Fannie Mae and Freddie Mac.
The Senate voted 72-13 in favor of the bill on Saturday after the House passed it three days before.
White House spokesman Tony Fratto says, "We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac. The Federal Housing Administration will begin to implement new policies intended to keep more deserving American families in their homes."
This new law, which happens to be one of the most far-reaching on housing in decades, is at the center of the government's efforts to address the nation's "housing meltdown."
The bill has two principal objectives: to offer affordable, government-backed mortgages to homeowners at risk of foreclosures, and to bolster Freddie and Fannie with a temporary rescue plan and a stricter regulator.
The White House reversed its long-standing threat to veto this bill last week; the Bush administration still objects to parts of the legislation, including aid to states to buy foreclosed property.
Bush decided to sign the bill since "oversight of the housing government sponsored enterprises (GSEs) and the new temporary authorities requested by [Treasury] Secretary [Henry] Paulson are urgently needed now, and they'll contribute to confidence and stability in housing and financial markets," said Fratto last week.
Provisions that will most directly affect communities and consumers include:
- A Larger Role for the Federal Housing Administration
The FHA will be able to insure up to $300 billion in new, 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if lenders are willing to write down loan balances to 90% of the homes' current appraised value.
The cost of this new FHA program (beginning on October 1 and staying in place for just a few years) will be funded by fees from Fannie and Freddie and fees paid by lenders and borrowers.
While the new law authorizes the FHA to insure up to $300 billion in loans, the CBO expects that the agency is only likely to insure roughly $68 billion and help keep roughly 325,000 people in their homes. These estimates are based on the CBO's assessment of who is likely to qualify under the program and accounts for a certain number likely to default anyway.
- A Stronger Regulator for the GSEs
The new regulator will have a greater impact on how well-funded the two government sponsored enterprises are - a major concern in the markets that has sent stock sin both companies plunging in the past two months.
- A Permanent Increase in "Conforming Loan" Limits
The new law will permanently raise the cap on the size of mortgages guaranteed by Fannie Mae and Freddie Mac to a maximum of $625,500 from $417,000. The FHA maximum loan limits for high-cost areas will also be increased to a maximum of $625,500. Higher loan limits will make it easier for borrowers to obtain mortgages because those mortgages are more likely to be traded if they are considered conforming.
The new law contains a tax refund for first-time home buyers worth up to 10% of a home's purchase price but no more than $7,500. This refund, however, serves more as an interest-free loan since it is required of borrowers to pay back the refund over 15 years in equal installments.
- A Ban on Down-Payment Assistance from Sellers
The program that has previously allowed sellers to provide down payment assistance for FHA loans will be eliminated. The law will also increase to 3.5% from 3% the down payment requirement for borrowers seeking FHA loans.
- A New Affordable Housing Trust Fund
The law will establish a permanent fund (financed by fees from Fannie and Freddie) to encourage affordable housing.
- Grants to States to Buy Foreclosed Properties
The law grants $4 billion to states to buy and rehabilitate foreclosed properties. The Bush Administration has opposed such funding, stating that it will benefit lenders instead of homeowners.
- Bolstering of Fannie and Freddie
The most controversial and most recent addition to the new law provides temprary authority for the Treasury to lend a financial hand to Freddie Mac and Fannie Mae if the Treasury deems it necessary to help stabilize markets.
Shares have dramatically decreased in value in recent weeks as a result of concerns over whether Fannie Mae and Freddie Mac will have enough money to cushion future losses. Since early June, Fannie's stock prices has dropped 55% and Freddie's 64%. Over the past year, they have both dropped over 80%.
Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.
The new law includes provisions that let Treasury offer Fannie and Freddie an unlimited line of credit and buy stock in the companies. These provisions will expire in 18 months. Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could hurt taxpayers enormously. Treasury Secretary Paulson has said that simply having the powers in place may boost confidence in the two companies enough to preclude the need for the Treasury Department to intervene.
The Congressional Budget Office estimated last week the potential cost of a rescue could be up to $25 billion. CBO said there is a better-than-50%-chance that Treasury wouldn't need to step in. Also, they believe there is a 5% chance that Fannie's and Freddie's losses could cost the government up to $100 billion.
