CHN: Mortgage Crisis from the Perspective of Homeowners

Fearing widespread collapse of global financial markets the Federal Reserve moved quickly to avert disaster by facilitating the purchase of a leading global investment bank, Bear Stearns, by J.P. Morgan Chase.  The Fed bailout of Bear Stearns, in essence, consists of $30 billion in taxpayer-backed guarantees for the firm’s assets.  At the core of the current crisis facing investment banks is that the securities they trade are backed by subprime mortgages with diminished value as housing prices are in a free-fall and home foreclosures spiral out of control.  While the Administration focuses on ameliorating the impact on financial markets and warns against congressional overreaction to limit the number of foreclosures, congressional leaders are gearing up to act on behalf of at-risk homeowners.
Both Representative Frank (D-MA), Chairman of the House Committee on Financial Services, and Senator Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, are developing legislation that would provide homeowners facing difficulty in meeting their mortgage payments the opportunity to refinance abusive loans.  The purpose of the legislation they have outlined is to stem the significant rise in mortgage foreclosures.  The legislation would allow the Federal Housing Administration (FHA) to insure and guarantee refinanced mortgages that have been restructured by mortgage holders and lenders to a level that the borrower can reasonably by expected to pay.  The lender holding the initial mortgage would receive a cash payment from an FHA-approved lender of less than the original mortgage but more than they could collect from the borrower.  In exchange, lenders would be relieved of further risk from the mortgages which a new FHA-approved lender would then hold and the FHA would ensure.

Only owner-occupants would be eligible for the new FHA-insured mortgage.  No investors or investor properties would qualify.   The program would be voluntary.   Provisions would be put in place to prevent borrowers from abusing the system, for example, by quickly selling their home at a profit.  If they sold within five years they would pay an exit fee and a share of any profits to FHA.  Borrowers would also be required to purchase FHA insurance.  Both House and Senate bills will sunset in five years.

The House bill has another component that includes providing $10 billion in loans and grants to states to purchase and rehabilitate vacant, foreclosed homes and rental properties.  States would receive funding based on their percentage of nationwide foreclosures adjusted to account for their state’s median home price.  They, in turn, would allocate funds to housing authorities and other government agencies, nonprofits, and private-sector entities for the purchase and resale of foreclosed homes to new owner-occupants.  Government entities and nonprofits could also receive these funds for rental housing developments.  Twenty-five percent of the funds could be used for grants to pay property taxes, insurance during the pre-occupancy phase, and could also cover down payment and closing costs.  Seventy-five percent of the funds would be in the form of loans, which must be repaid in two years for homeownership properties and five years for rental properties, to finance acquisition and rehabilitation costs.

Low-income housing advocates are expressing concern that this and other pending legislation attempting to address the housing crisis does not target at least some of the resources to those with the highest housing cost burdens.  The state homeownership program in legislation Representative Frank plans to introduce, for example, could benefit families with incomes as high as 140 percent of area median income.  The rehabilitated rental properties could provide housing to those whose income is up to100 percent of area median. According to the National Low Income Housing Coalition, nationwide renters with the heaviest housing cost burdens are extremely- and very- low income with incomes below 30 percent and 50 percent of area median incomes, respectively.   There are also many potential qualified homeowners earning significantly less than 140 percent of area median income.

Housing and Homelessness