House Passes Housing Stabilization Measure

The housing legislation was passed in two bills, H.R. 5818, The Neighborhood Stabilization Act, and H.R. 3221, The American Housing Rescue and Foreclosure Prevention Act. Both are top legislative priorities for NLC, whose recent polling of local elected officials indicates that 62 percent of cities are experiencing significant increases in home mortgage foreclosure, and 33 percent reporting increases in vacant properties and declines in local revenues as a result. 

“While the home foreclosure crisis continues to take its toll on millions of families, cities and towns are also hurting,” said NLC President Cynthia McCollum, council member, Madison, Ala., upon passage of the bills. “We applaud House Financial Services Chairman Barney Frank (D-Mass.) and the entire House of Representatives for their commitment to working together to advance a package that not only helps cities and towns respond to the crisis, but also strengthens and stabilizes the housing market in its entirety.”

Although the bills passed with strong bipartisan support, with nearly 40 Republicans joining Democrats on the two bills, the measures did not gain veto-proof majorities. As a result, the Senate may choose to scale the bill down to levels more in line with President Bush, who threatened to veto the House-passed legislation.

Senate Banking Chairman Christopher Dodd (D-Conn.) has indicated a desire to move quickly, saying, “The passage of [the House] bipartisan measure sends a clear signal to Americans — and the White House — that Congress is committed to helping people keep their homes and stabilize the markets. I am working with my colleagues in the Senate Banking Committee to pass bipartisan legislation to reduce foreclosures and restore liquidity to the mortgage market.”

The Neighborhood Stabilization Act
The Neighborhood Stabilization Act, introduced by Housing Subcommittee Chairwoman Maxine Waters (D-Calif.), passed the House by a bipartisan vote of 239-188.

The bill authorizes a one-year $7.5 million grant program and a $7.5 billion federal loan program to help sustain neighborhoods and communities experiencing the highest rates of home foreclosure. Funding could be used to purchase qualified houses made vacant by foreclosure, to rehabilitate the houses to restore compliance with local codes and general habitability, including energy-efficiency improvements, and to re-sell or rent the houses to income-targeted families.

In addition, recipients could use up to 8 percent of their grant to cover operating and holding costs, such as management fees, taxes and insurance, and other administrative overhead associated with the property. The bill gives the Department of Housing and Urban Development the ability to approve funds for the demolition of houses too damaged for rehabilitation, but bars funds for the demolition of public housing.   

In the original bill, funding was directed to state governments for redistribution to local governments and other housing and community development entities. Waters, however, offered an amendment supported by NLC that made cities and urban counties with high rates of foreclosure, along with the states, eligible for the funding directly.  The amendment passed by a vote of 256-157. 

According to the National Foreclosure Prevention and Neighborhood Stabilization Task Force, the $15 billion investment will generate at least $38 billion in direct and "ripple effect" economic activity nationwide, employ 120,000 people and restore nearly $225 million per year in local government real estate tax collections.

The American Housing Rescue and Foreclosure Prevention Act
The American Housing Rescue and Foreclosure Prevention Act, which passed the House in the form of three large housing and tax amendments that completely rewrote a foreclosure rescue bill the Senate passed in April, is actually several bills packaged together under the leadership of House Financial Services Chairman Frank.

The bill would stimulate foreclosure prevention efforts undertaken by private lenders and mortgage servicers, provide increased liquidity in the mortgage markets, and strengthen federal regulation and oversight of the lending industry.

The centerpiece of the bill is the FHA Housing Stabilization and Homeowner Retention Act.  Under the bill, the Federal Housing Administration (FHA) would set up a new program to encourage lenders to voluntarily forgive a portion of outstanding debt on troubled mortgages. In exchange for forgiving the debt, those mortgages would be refinanced into conventional, lower-interest mortgages guaranteed by the FHA.

To qualify for the voluntary program, lenders would have to accept a payment of no more than 85 percent of the currently appraised value of the property as payment in full on the loan. Homeowners would be eligible only if they could reasonably be expected to repay the refinanced loan and would have to share any profit from future home appreciation with the government. 

The Congressional Budget Office estimates that about 2.8 million borrowers will have foreclosure proceedings initiated against them in the next four years, and that most of these would be eligible for an FHA-guaranteed refinanced loan, provided their lenders agree to participate in the program.

The bill also includes Federal Housing Administration and Government Sponsored Enterprise (GSE) reform bills passed by the House last year. FHA reform would allow FHA to provide home loans in higher-cost housing markets and to individuals with less-than-perfect credit. The GSEs, composed of mortgage finance giants Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, would be given similar latitude to finance a wider range of mortgage loans.

Another provision in the bill would establish a federal Affordable Housing Fund paid for by Fannie Mae and Freddie Mac, which would contribute funding equal to 1.2 percent of their total outstanding mortgages. Only very-low and extremely low-income families would be eligible for assistance from the fund, and the assistance could be used for rental housing, homeownership, and public infrastructure activities in conjunction with housing. 

Finally, the bill would provide a legal safe harbor for mortgage loan servicers making certain loan modifications. The provision responds to concerns that mortgage loan servicers are being discouraged from modifying loan terms to prevent foreclosures by the fear of potential lawsuits from investors that stand to lose some profit on the loan modification.

A number of tax provisions originated by House Ways and Means Chairman Charlie Rangel (D-N.Y.) are included in the bill. Most significantly, the bill authorizes an additional $10 billion in tax-exempt bonds for state housing finance authorities to refinance subprime loans. Although state housing finance authorities typically finance mortgages for first-time homebuyers, few currently engage in the riskier activity of refinancing. 

In response to the market turmoil earlier in the year that resulted in the downgrade of several major bond insurers, the bill incorporates the text of NLC-supported legislation (H.R. 2091) that would allow the Federal Home Loan Banks to compete with bond insurers to guarantee tax-exempt municipal bonds. The Federal Home Loan banks are currently prohibited from guaranteeing tax-exempt municipal bonds issued to finance anything other than housing projects. The bill would allow the Federal Home Loan Banks to expand their financing capacity into broader community and economic development, including infrastructure improvement programs.

The bill also includes several reforms aimed at increasing state-supported financing for low-income housing programs. The bill temporarily increases the amount of Low-Income Housing Tax Credits distributed to states, and relaxes some program requirements, which would provide for an increase in the development of low-income rental housing. The bill would also create a change in how the number of tax-exempt housing bonds issued by states are counted, effectively increasing the amount of housing bonds states can issue for the development of low-income housing.

Finally, to help first-time homebuyers, the bill creates a refundable tax credit of up to $7,500 that would serve as an interest-free loan that could go to the down payment. The bill would also provide an additional standard deduction for state and local property taxes of up to $350 for individuals and $700 for couples.