Affordable Housing Fund in Package
 

There is a sense of urgency among Congressional lawmakers and the Administration that they must enact legislation to address the looming mortgage crisis before leaving for the August recess.  Last month there were over 250,000 foreclosures nationwide adding to the 1.5 million families that have already lost their homes.  This follows a 17 percent drop in housing prices over the last year.  The housing bubble burst after an inflation-adjusted 70 percent increase in the price of homes from 2000 to 2006.  Home prices are still 30 percent above the 2000 level.

The House and Senate have been volleying a massive housing bill back and forth, the Foreclosure Prevention Act of 2008, H.R. 3221.  The bill passed the House in May and moved to the Senate where changes were made before the bill passed with bi-partisan support on July 11.  The bill is now back in the hands of the House.  A centerpiece of the bill is a $300 billion expansion of the Federal Housing Administration’s (FHA) program of loan insurance.

For borrowers at risk of foreclosure who cannot refinance their mortgages because the value of their home is now less than the mortgage, the bill provides an opportunity to renegotiate their loans if the lender voluntarily agrees.  It would allow FHA to insure and guarantee refinanced mortgages that have been restructured to a level that the borrower can reasonably be expected to pay.  The lender holding the initial mortgage would receive a cash payment from a 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 and borrowers must share with the government any profit from the resale of a refinanced home.  The program is estimated to serve only 400,000 of the 3 million homeowners who will likely lose their homes in the next year.  The estimated $1.7 billion cost for this new program, named the HOPE for Homeowners Program, is based on the assumption that ultimately approximately one-third of the refinanced mortgages will result in foreclosure for a second time.

Other provisions in the bill returned by the Senate to the House include $3.9 billion in Community Development Block Grant (CDBG) funding to assist localities in buying and rehabilitating foreclosed homes that can be resold, a one-time refundable tax credit of up to $8000 for first-time homebuyers, and an additional standard federal income tax deduction for state and local property taxes.  The bill also calls for a new regulator with broad powers to set capital standards and limits on the mortgage portfolios of Fannie Mae and Freddie Mac.

The bill has taken on a new sense of urgency amid recent concerns about Fannie Mae and Freddie Mac, government sponsored enterprises (GSEs) – privately held corporations created and backed by the federal government to reduce the cost of borrowing.  Fannie and Freddie are investor-owned, for-profit companies.  While they hold higher quality loans versus those purchased in the subprime market, the two secondary mortgage giants hold nearly half of the nation’s $12 trillion mortgage debt in their portfolios and those mortgages are also deteriorating as housing values drop.  All the loans they held were under $417,000 for a single-family home until Congress temporarily raised the limit to $730,000 in certain high-cost areas when it passed the economic stimulus package in late winter.  One of the differences in the House and Senate versions of H.R. 3221 is the $625,000 limit in the Senate bill and the desire of the House to raise it to $730,000 in high-cost areas.

Rescuing Fannie and Freddie
In recent weeks financial markets began losing confidence in Fannie and Freddie and their stock began to plummet in the midst of the continuing housing slump and anxieties about the companies’ finances.  On July 13, Henry Paulson, Secretary of the Treasury Department, announced the Administration’s plan to keep the two financial institutions sound by increasing their line of credit and allowing the Treasury to buy stock in the companies.  The Administration’s plan would also give the Federal Reserve a supervisory role over the two GSEs along with the new regulator created in the legislation evolving in the House and Senate.

Congress must provide authority to the Treasury for its plan.  The Administration is asking Congress to fold its proposal into H.R. 3221.  There is concern among some in Congress that the plan places no cap on the size of the new line of credit nor on the amount of stock in the companies the government could buy.  Congressional leaders and the Administration will need to determine the cap on the credit and the limit on the amount of stock the government can purchase.  At the same time Fannie and Freddie, concerned that if the government owns stock in their companies it will tighten government regulation, insist on authority to sell sufficient stocks to the public and that the government offer to buy stock is a ‘backstop’ that will likely be unnecessary.

The viability of Fannie and Freddie is crucial to the financial health of the U.S. and there is widespread agreement that they must be shored up.  Anxieties remain, however, because ultimately it is taxpayers who will be exposed to huge additional risk if the GSEs are unable to be self-sustaining. 

Affordable Trust Fund Established
The bill also establishes a national affordable housing trust fund to construct, rehabilitate and preserve housing.  At least 90 percent of the funds must be used for rental housing, with at least 75 percent used to house people with income below 30 percent of the area median, and all of the funds would have to benefit people with incomes below 50 percent of area median income.  These provisions ensure that the fund focuses on the very lowest income households, who have the greatest housing affordability problems.

The housing trust fund is set up so that it can receive funding from multiple sources.  An initial source of funding identified in the bill is a fixed percentage of new business generated by Fannie Mae and Freddie Mac.  The first year 100 percent of the money would be diverted from the housing trust fund to pay for the HOPE for Homeowners Program discussed above.  The second year 75 percent and the third year 50 percent of the monies would be directed to the HOPE program.  Thereafter, all of the money will be placed in the affordable housing trust fund.

The House could act on H.R. 3221 as soon as this week, then quickly resolve differences with the Senate so the legislation could reach the President’s desk before the August recess.  Prior to the escalating concerns about Fannie Mae and Freddie Mac, the Administration threatened to veto H.R. 3221 if the $3.9 billion in CDBG funding remained in the bill.  The Administration’s overriding concerns regarding the need to move swiftly on legislation to shore up the GSEs are giving supporters of the CDBG funding confidence that money will remain in the bill.

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