President Signs Federal Housing Bill
by Mike Wallace
Less than 24 hours after receiving landmark federal housing reform legislation passed by Congress, President Bush made good on his decision to withdraw his previous veto threat and signed the Housing and Economic Recovery Act of 2008 into law. NLC has worked closely with Congressional leaders for more than a year in support of the bill.
The President was joined by Treasury Secretary Henry Paulson, his chief negotiator on the legislation, and Housing and Urban Development Secretary Steve Preston, who will be responsible for several new programs under the bill.
The Housing Rescue and Foreclosure Prevention Act brings additional relief to homeowners in response to the mortgage foreclosure crisis and is intended to strengthen the economy by restoring confidence in the housing and credit markets. The bill will also ease the burden of vacant housing caused by foreclosure on cities and states.
Enactment of the bill was unusually swift, reflecting the Administration’s desire to give a boost to the housing market, and the economy, as quickly as possible. The swiftness also reflected the rapid pace of negotiations between House and Senate leaders and the Administration on the bill in the weeks preceding the final weekend Senate vote, where the bill overwhelmingly passed by a margin of 72 to 13.
Upon passage, House Financial Services Chairman Barney Frank (D-Mass.), a chief architect of the bill, congratulated the Senate and said, “We are all now going to work together with the Administration to see that this is implemented as rapidly as possible.”
Frank went on to urge mortgagors to withhold foreclosure proceedings against troubled borrowers who will be eligible for assistance under the bill until the programs are in place.
NLC President Cynthia McCollum, council member, Madison, Ala., offered praise for Congress and the Administration saying, “NLC congratulates the Administration and Congress for enacting legislation that will help thousands of Americans stay in their homes, provide cities with the funding they need to stop the downward spiral of home vacancies and neighborhood deterioration, and stabilize the home financing system. The Administration and Congress are often criticized for partisanship and stalemates on the most vexing problems facing our nation, so it is particularly important to acknowledge when the system works as the framers of the Constitution intended.”
McCollum continued, “The legislation signed today gives local governments the federal assistance they need to bolster and expand the measures they have begun on a city-by-city level. With Americans expected to lose $1.14 trillion in housing wealth by the end of 2008, Congress and the Administration finally did what our local officials must do every day in cities across America — they put aside partisanship and focused on getting the job done.”
Federal Housing
Reform
According to Senate Banking Committee Chair Christopher Dodd (D-Conn.), the bill “fundamentally alters the way [the federal government] does business when it comes to housing.” The bill modernizes the Federal Housing Administration (FHA) and creates a new federal regulator, the Federal Housing Finance Agency, for the government sponsored entities (GSE’s) Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
The most significant help the bill offers for struggling homeowners is the “HOPE for Homeowners” program. Under the program, FHA is authorized to insure up to $300 billion in distressed mortgage loans that will be refinanced into smaller, lower-interest conventional loans. In exchange for this assistance, homeowners under the program would be required to share any future appreciation in home value with FHA, and lenders would have to forgive a portion of the loan’s balance to participate.
Other program requirements would ensure none of the benefits go to property speculators. Congress estimates the program will help 400,000 distressed families remain in their homes
The bill opens high-cost housing markets to FHA insured loans by raising FHA loan limits from 95 percent to 115 percent of the area median home price, with an overall cap of approximately $625,500.
Similarly, the legislation raises the limit on the size of mortgage loans Fannie Mae and Freddie Mac can purchase from $417,000 to $625,500. Together Fannie Mae and Freddie Mac provide financing for about half of the mortgage loans in the U.S. In addition, the Treasury Department is given broad new authority to extend credit and investment in these organizations to restore market confidence.
Lastly, in response to the market turmoil earlier in the year that resulted in the downgrade of several major bond insurers, the bill includes an NLC-endorsed provision that would allow the Federal Home Loan Banks (FHLBs) to guarantee tax-exempt municipal bonds. This will provide cities with an additional financing option for small and medium projects, including housing, economic development, and infrastructure improvements. The bill also makes Community Development Financial Institutions eligible for FHLB membership.
Affordable Housing and Neighborhood
Stabilization.
The bill includes a one-time allocation of nearly $4 billion in additional Community Development Block Grant (CDBG) neighborhood stabilization funds to help ease the burden of vacant housing caused by foreclosure. Unlike normal CDBG funds appropriated annually, this additional $4 billion in CDBG funds is for the acquisition, rehabilitation or demolition of foreclosed and abandoned properties.
The bill gives the Department of Housing and Urban Development (HUD) 60 days to devise a distribution formula, effectively setting a late-September deadline to create the formula to determine beneficiaries and levels of funding, and another 30 days to make the funding available to qualifying cities and states. The bill mandates funds go to cities and states most in need, and directs HUD to consider three criteria: the number and percentage of home foreclosures in each state or locality; the number and percentage of homes financed by a subprime mortgage in each state or locality; and the number and percentage of homes in default or delinquency in each state or locality.
The funds must benefit people and families whose income is no greater than 120 percent of the area median, and at least 25 percent of the funds must be used on properties that would be used to house those with incomes below 50 percent of the area median income.
Homes acquired with CDBG funds would have to be sold at equal or less than the cost to acquire and rehabilitate the home. Any revenue generated in excess of program costs would be reinvested in the program for five years, after which such revenue would be returned to the Treasury.
The bill also realizes a long-time policy recommendation of NLC by establishing an Affordable Housing Trust Fund funded by Fannie Mae and Freddie Mac, which would both contribute an amount equal to 0.42 percent of total new mortgages they purchase annually. All Housing Trust funds will initially be allocated to the FHA to support the HOPE for Homeowners program. Beginning in 2010, a percentage of Housing Trust funds would be allocated to the states to fund the construction and rehabilitation of affordable and rental housing. The percentage of funds allocated to states would grow annually.
The bill temporarily increases the Low Income Housing Tax Credits states can award to developers to boost construction of low-income rental units and provides $11 billion in additional tax-exempt bond authority for state housing finance agencies to finance mortgages for new homeowners and refinance adjustable-rate subprime loans into fixed-rate affordable loans. Although state housing finance authorities typically provide mortgage loans for first-time homebuyers, most currently do little, if any, loan refinancing. Homeowners would be subject to state underwriting standards to qualify.
The bill also provides $150 million in additional funding for housing and foreclosure-intervention counseling and $30 million for legal services to distressed borrowers.
Other Housing Finance Reforms The bill creates a uniform licensing and registration system for all loan originators, including mortgage brokers, to increase the accountability and transparency in mortgage transactions, and to help mortgage fraud investigators.
Brokers would be licensed at the federal or state level, depending on whether their loans are brokered through federal or state regulated banks. States will have 12 months to establish licensing systems that meet minimum requirements outlined in the bill. Failure to meet either the requirements or time limit will result in HUD establishing and maintaining a licensing system for the state.
Finally, the bill provides a new temporary tax credit of up to $7,500 for first time homebuyers that would serve as an interest-free loan for home downpayments to be repaid over 15 years. The bill also allows a one-time tax deduction of $500 ($1000 for joint filers) for non-itemizers for local property taxes.
NLC will closely monitor and continue to report on the implementation of the new programs and reforms provided under the bill that are important to cities and towns.
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