Taxpayers to foot housing rescue bill
As we all know by now, between 2003 and 2006 mortgage lenders extended trillions of dollars in loans encouraging buyers with easy money and fueling the inflated housing market. After the sub-prime adjustable-rate loans began to reset, marginal buyers found they could no longer afford the payments creating unprecedented foreclosures, an estimated 3 million this year alone. Now it appears the good old American taxpayers are footing the bill for both lender and buyer excesses.
Last week Congress and a reluctant President Bush both agreed to throw a lifeline to about 400,000 borrowers who have homes about to go into foreclosure, with the potential of up to another 2 million borrowers participating in the program. The mammoth $300 billion housing rescue bill is designed to help troubled homeowners avoid foreclosure by allowing them to finance into more affordable government backed loans through the FHA. At the same time, the legislation props up mortgage giants Fannie Mae and Freddie Mac, whose recent losses have negatively impacted the financial markets.
The bill isn’t perfect with the president giving in on a permanent affordable housing fund in exchange for laws reining in Fannie Mae and Freddie Mac. But if you’re a homeowner in trouble and can hang on until the legislation kicks in on Oct. 1, you might be eligible for some assistance.
To qualify, borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. They also must be spending at least 31 percent of their gross monthly income on mortgage debt. Borrowers can either be up to date or already in default, however, they must prove that they will not be able to keep paying their existing mortgage. There are restrictions relative to retiring other debt on the home and a moratorium on future home equity loans. Total debt cannot exceed 95 percent of the home’s appraisal value and the loans are capped at $625,000.
The program is voluntary for the lenders, who would have to agree to reworking the loan, which basically means they agree to finance 90 percent of the home’s current value regardless of what the original note was. You can be sure that participating lenders won’t sign off on a workout unless they think they will be losing less money than allowing a costly foreclosure proceeding.
There will be little up-front costs to borrowers, however, there are other strings attached. Borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan which will be 1.5 percent of the principal annually. Also, borrowers agree to share any profits from future home price appreciation with the FHA and pay a 3 percent exit fee. Plus, they will have to agree to pay the FHA 100 percent of any profits they realize from higher home prices if they sell or refinance within a year. After a year, borrowers will share 90 percent of the profits, with the percentage dropping in 10 percent increments to a permanent 50 percent after the fifth year.
Homeowners who will benefit the most are, of course, those who have experienced the biggest loss in home values and who are planning on remaining in their homes for more than five years. In addition, FHA loans carry reasonable interest rates which are fixed. The real benefit of this legislation, however, is that hundreds of thousands of homeowners will be able to remain in their homes and avoid a foreclosure action. For more information, borrowers can contact their current mortgage servicer or go to an FHA approved lender for advice and more details on qualifying for this program.
Whether or not this legislation does enough to help stabilize the national housing crisis remains to be seen. For now it’s our only option. The rescue bill gives a little to the lenders, a little to the borrowers and nothing to the taxpayers who are the ones who really need to be rescued.