Mortgage Reform: The Housing and Economic Recovery Act of 2008
by
Attorney Stephen R. Elias
The Housing and Economic Recovery Act increases industry regulation and helps some homeowners at risk for foreclosure.
On July 30, 2008, the Housing and Economic Recovery Act of 2008 (“the Act”) was signed into law. The Act, Congress’s response to the mortgage meltdown of recent years, aims to:
- make sure the government-sponsored home loan agencies don’t ever run out of money
- increase regulation over the government-sponsored housing agencies and over mortgage brokers
- provide relief to a portion of the homeowners who are at risk of foreclosure, and
- assist states and localities in converting abandoned property into affordable housing.
Here’s a brief primer on the Act.
What Is the Housing and Economic Recovery Act?
The Housing and Economic Recovery Act of 2008 (H.R. 3221) is a collection of more specific acts that address issues related to the U.S. residential housing and finance industries. This collection includes:
- the Federal Housing Finance Regulatory Reform Act of 2008, which addresses structural and operational issues regarding the financing of residential real estate through the FHA and the government-sponsored home loan agencies known as Freddie Mac and Fannie Mae
- the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, which creates a new bureaucracy to regulate the mortgage broker industry
- the HOPE for Homeowners Act of 2008, which creates a program under which certain homeowners will have the opportunity to refinance their way out of foreclosure if they're able to get their original lenders to go along, and
- various subtitles allocating billions of dollars to fund foreclosure-avoidance counseling agencies, and to purchase and rehabilitate abandoned properties for the purpose of expanding the nation’s stock of affordable housing.
Here’s an explanation of some of the more important provisions of the Act for current or would-be homeowners.
Bailout of Freddie Mae and Freddie Mac
By far the most important aspect of the Housing and Economic Recovery Act of 2008 is that it places the U.S. Treasury (and its ability to print money) in the service of Freddie Mac and Fannie Mae -- the two home loan banks that either own or insure at least half the loans made to U.S. homebuyers. In other words, the Act assures prospective investors and homebuyers that the U.S. home loan industry’s doors will be open for business even if the rest of the economy shuts down.
While the downside of this commitment is potentially huge -- a taxpayer bailout involving many billions of dollars if the entities fail -- some of the folks who purport to understand macroeconomics assure us that the risk of failure is very small. Other economic mavens aren’t so sure. All parts of our government, however, are dedicated to not letting the housing industry go bust.
Supervision of Freddie Mac and Fannie Mae
To minimize the risks associated with this bailout, the Act creates a new regulatory body charged with ensuring that Freddie Mac, Fannie Mae, and the Federal Housing Administration operate in the public interest, pay their executives a reasonable rather than excessive level of compensation, and maintain certain minimum levels of capitalization to avoid insolvency.
The idea behind the supervision is to reduce the likelihood that those in charge of these federally sponsored housing entities will indulge in the risky economic behavior that previously drove the value of their stock to near-oblivion. Yet some fear that the new bureaucracy may accomplish very little other than providing new employment opportunities to the thousands of employees who have been laid off from their financial industry jobs.
Regulation of Mortgage Brokers
Many observers of the housing crisis have blamed mortgage brokers (real estate professionals that find mortgages for homeowners) for originating loans that were both unaffordable and based on false or misleading information -- such as overstatements of the applicant’s income. Previously, there was little accountability. Once a mortgage broker brought the prospective homeowner and lender together, and received a commission, the broker's role in the transaction was done and the loan became somebody else’s problem.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 requires states to license mortgage brokers under a nationwide regulatory system. Mortgage brokers will now have to undergo background checks, training, testing, and mandatory continuing education, and will be subject to a net worth or surety bond requirement as a means of recourse for customer abuse. Consumers will be given easy and free Internet access to their mortgage broker’s employment and disciplinary history (unless the discipline is confidential).
Higher FHA Insured Loan Limits and More Tax Breaks
The Act also expands the overall number of mortgages that will be insured by the Federal Housing Administration. (Mortgages insured by the FHA have lower interest rates.) Previously, FHA-insured loans (called “conforming” loans) had to be $417,000 or less. The Act permanently increases the upper limit for conforming loans from $417,000 to $625,500 in high cost areas such as San Francisco and New York City.
Also, first-time homebuyers will receive a one-time $7,500 tax credit against the purchase price of the home (provided it is purchased between April 2008 and July 2009), and taxpayers who don’t itemize deductions will still be able to deduct up to $500 a month ($1,000 for joint filers) for property taxes. The tax credit must be repaid to the IRS in equal installments over a fifteen-year period, and so qualifies more as an interest-free 15-year loan than a tax credit.
Increasing the Stock of Affordable Housing
The Act allocates nearly $4 billion to state and local agencies to deal with blight and increase the stock of affordable housing. This will be done by buying up abandoned properties at a huge discount and converting them to affordable housing. While this amount of money will barely dent the national need for such housing, it's a start. And if the programs are successful, more money is likely to follow.
HOPE for Homeowners: Foreclosure Prevention
The HOPE for Homeowners program is designed to help homeowners at risk for foreclosure. Assuming they qualify, and their lenders agree to participate, these homeowners will be able to refinance their currently unaffordable variable-rate mortgages into affordable, 30-year fixed rate mortgages insured by the FHA. (To learn more about this program, including who qualifies and how to get help, read Nolo’s article Mortgage Refinancing to Avoid Foreclosure: The HOPE for Homeowners Act.)
For more information about dealing with the threat of foreclosure, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).
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