Wednesday, July 23, 2008

Housing "Rescue" Bill to Pass Soon

President Bush today withdrew his threat to veto the pending housing bill. This makes it likely that it will pass soon. The bill includes provisions to buttress Fannie Mae and Freddie Mac and a controversial measure giving money to blighted communities to buy and rehabilitate abandoned homes. So taxpayers will be spending money which will largely accrue to the benefit of banks and other lenders. This may help improve the health of the overall financial system, which benefits us all. However, some taxpayers may receive some direct benefit via the "foreclosure rescue" portion of the bill. It is difficult to get specifics on these provisions, but here is the best article that I have found explaining them.

There are a couple of points that threaten to make these provisions of the bill difficult for consumers. First, lenders must agree to refinance on a case-by-case basis. One can expect that there will be at least some inclination on their part to do so. However, standards that they set may make a refinancing available to only a very few. Ironically, it may be homeowners who are the most likely to default and who can take advantage of the refinancing. That's because the FHA is guaranteeing the new loans made under the new program. So lenders could theoretically pass the risk of lost causes to the government. I wonder how many lenders are going to agree to forgive loan balances and re-write guaranteed loans for 90 percent of the current appraised value.

The other problem is that many people have second and third mortgages (HELOCs for example). It is very unlikely that these lenders will agree to cooperate in a deal between the homeowner and first mortgage lender. Unless the first mortgage lender agrees to cut them in out of their own pocket, they would end up with nothing at all under a new FHA loan. One is unlikely to get voluntary compliance by offering nothing. If the value of a home has fallen significantly and junior mortgages are wholly unsecured, a Chapter 13 case to strip the junior mortgages followed by a negotiated FHA-backed refinancing with the first mortgage lender might be worth a look under these circumstances.

We'll have to wait to see what real impact this housing bill has on our foreclosure problem.