President Bush Signs New Housing Rescue Bill But Why

This morning, President Bush signed the housing rescue bill that the Senate passed on Saturday. The sweeping $300 billion housing rescue bill is aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac.

While signed today by the President, it will not become an effective law until October 1, 2008. The law’s supporters feel that this legislation will help thousands of at-risk borrowers will supposedly now be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).

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The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program – but the bill allows for as many as 1 million or 2 million borrowers to participate in the program. Too bad there are nearly 5 Million homeowners in or near foreclosure, many of whom are upside down on their mortgages.

“We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac,” said White House spokesman Tony Fratto. “The Federal Housing Administration will begin to implement new policies intended to keep more deserving American families in their homes.”

When did the more deserving American become the one who has defaulted on paying back their mortgage?

Yesterday I covered what I felt the undertones of the bill were and how I felt that they were almost socialist in nature. I have to say strongly that I think this entire bill is a sham and that it’s a waste of tax payer dollars. We all know that Bush did not want to sign this but he caved. Pure and simple, he caved to election year pressure.

But the president decided to sign it since “oversight of the housing government sponsored enterprises (GSEs) and the new temporary authorities requested by [Treasury] Secretary [Henry] Paulson are urgently needed now, and they’ll contribute to confidence and stability in housing and financial markets,” added White House spokesman Tony Fratto.

Concerns over whether Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) will have enough money to weather future losses in the housing market has sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade on Friday.

I recently read an article on Michelle Malkin’s blog and I could tell she was absolutely fired up. And you know what…she has a right to be. We all do. This is a crock being perpetrated on the American people and we’re being force fed BS that people were “taken advantage” of by the banks.

“The theme is that the subprime crisis isn’t merely the result of “predatory lenders,” but of countless predatory borrowers and reckless homeowners as well who bought more home than they could afford and binged on home equity loans-and now expect responsible renters and conscientious borrowers to cover their asses and assets.” Michelle Malkin

So here is a breakdown of what this new law really means and what you should know.

Who’s eligible?

• Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program.
• They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage – and attest that they are not deliberately defaulting just to obtain lower payments.

Ok….so in essence you want to make sure that those who are credit worthy hard working Americans have no shot at getting any Federal funding. So if my “baby daddy” ain’t with me no more then I can get some money. But if we’re a married hard working couple trying to make it..too bad! Here’s a question. Isn’t that what a short sale is for? To help you sell the home because you have proven you can’t afford it? Now this law is giving money to people who can prove they can’t afford to pay? Is anyone else seeing this and not screaming???

• Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it’s to pay for necessary upkeep on the home. Hmmm…how are they going to do that? If they are in default on the first mortgage, how are they going to come up with the cash to pay off the HELOC they got to drive the LTV to over 100% of the home’s actual value?
• To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.

So in essence, if you are upside down you are SOL but those who can least afford it get a new high LTV, low interest loan while the rest of the credit worthy, hard working suckers need to fend for themselves.

So just how will this refinancing process work?

• This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home’s current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender.
• But lenders won’t sign off on a workout unless they think that they’ll lose less money on that than they would by allowing a home to go through the costly foreclosure process.
• Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home’s current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.
• Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home’s market value.
• If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.
• As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.

So what you have here in actuality is a National Short Sale program backed by the United States government. If you are not sure what a short sale is, it is a process wherein the borrower must prove that they can’t afford to pay the mortgage and then the bank agrees to reduce the amount they owe, or forgive what they are owed so they can sell the house.

Short Sales have been known to have discounts of as much as 50% or more on them. Now, with this new law, banks only need to drop the amount they are owed down to 90% of the home’s value and the homeowner can get money from the government to effectively do a short sale on their own home.

Seriously..this is what they are doing. Well the only good thing about this is that most won’t apply or even avail themselves of the program, most Realtors won’t do the work to have their clients utilize the program and most will continue to become REO properties anyway.

In that instance we can then talk to the banks about the REO pricing since we know what kind of discount they anticipated accepting if a homeowner availed themselves of the program.

The key will be determining the realistic CURRENT AS-IS market valueof the subject property. For once, let’s be realistic people. No more flowery BPO’s so you can get an REO listing. how about seriously giving some realistic valuations complete with an integrated regression analysis. If you don’t know how to value a property, why not leave it to the professionals.

What does it cost?

• There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.
• However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.
• Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they’ll pay a “3% exit fee” of the mortgage principal to the FHA when they resell or refinance.
• Plus, they’ll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.
• After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

The ultimate angel investor…the American Taxpayer. Does anyone think this will actually work? What happens when the previously defaulted homeowner, defaults again? What happens when they don’t make the 1.5% payment each year? Will the FHA become the world’s biggest wholesaler of real estate in the next five years? Will they just let people slide if they can’t pay?

The law includes provisions that let Treasury offer Fannie and Freddie an unlimited line of credit and buy stock in the companies. The provisions expire in 18 months.

Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.

Treasury Secretary Paulson has said that merely having the powers in place may boost confidence in the two companies enough to preclude the need for Treasury to step in.

The Congressional Budget Office last week estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie’s and Fannie’s losses could cost the government $100 billion

Once the government is in charge of the collection of these loans has the mortgage system then become an extension of the welfare state? Look a little bit socialist to anyone?

This does not look good by any means, but it is just my opinion. What’s yours? We’d love to hear from you on this.

sources: CNN Money | White House Release | FHA