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Bush Signs Housing Bailout Into Law

Measure criticized for not helping enough homeowners

July 30, 2008

The measure gives the U.S. Treasury Department the power to step in to protect the government-backed mortgage sellers, preventing them from going into default. By doing so, U.S. taxpayers will assume substantially more risk, promising to bail out the two firms if they begin to teeter toward bankruptcy.

"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."

In order to pass the bill, lawmakers had to officially raise the U.S. debt ceiling, increasing it to $10.6 trillion. The measure enjoyed bi-partisan support, sailing toward passage by a 72-13 vote.

It is the latest in a serious of extraordinary steps the government has taken this year to try and head off a major financial collapse. It follows a $29 billion loan by the Federal Reserve to JP Morgan Chase & Company to by the investment bank Bear Stearns, which was days away from default.

The bill's passage also comes on the heels of record price drops for both new and existing homes recorded in the past week.

"Not enough"

Under the new legislation, the Federal Housing Administration will be granted authority to insure up to $300 billion in refinanced mortgages, in hopes of reducing the rising number of home foreclosures. Critics of the plan have called it enormously risky for taxpayers. But Senate Banking Committee Chairman Christopher Dodd (D-CT) said Congress had to act quickly.

"With one of every eight homes projected to enter foreclosure over the next five years, and the economy shedding jobs as the costs of energy, health care and food skyrocket, the American dream has become a nightmare for countless families across the country," Dodd said. "This legislation will address our broader economic problems by helping to reform our housing sector and provide reassurances to our financial markets."

Others have criticized the legislation for not reaching far enough. The initiatives designed to help homeowners keep their homes are purely voluntary on the part of lenders, and not all lenders may choose to institute them. Even if they do, only 400,000 to 500,000 homeowners in trouble may qualify.

"The housing bill is a good step but even so will, at best, help about 500,000 families stay in their homes. That’s not enough," said Mike Calhoun, president of the Center For Responsible Lending. "The economy will continue to take a beating if we don't do more to stop 6.5 million foreclosures Wall Street analysts expect over the next few years."

Key provisions

The legislation contains a number of provisions that Dodd says will help homeowners and communities. The legislation also includes several tax measures authored by Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA). Key provisions include:

• The HOPE for Homeowners Act: Creates an initiative within the Federal Housing Administration (FHA) to prevent foreclosures for hundreds of thousands of families at no estimated cost to American taxpayers.

• Assistance for Communities Devastated by Foreclosures: To ensure that communities can mitigate the harmful effects of foreclosures, $3.92 billion in supplemental Community Development Block Grant Funds will be provided to communities hardest hit by foreclosures and delinquencies.

• Foreclosure Counseling for Families in Need: To help families avoid foreclosure, the bill provides $180 million in additional funding for housing counseling and legal services for distressed borrowers.

• GSE Reform: Creates a world class regulator for the government-sponsored enterprises (GSEs) so that these vital institutions can safely and soundly carry out their important mission of providing our nation's families with affordable housing.

• Treasury Emergency Authority: To shore up confidence of the financial markets in Fannie Mae, Freddie Mac and the Federal Home Loan Banks, the legislation contains several temporary provisions requested by the Treasury Secretary including authority for Treasury to purchase common stock and debt securities issued by the GSEs.

• Preserving the American Dream for Our Nation's Veterans: This bill contains several provisions to help returning soldiers avoid foreclosure, including lengthening the time a lender must wait before starting foreclosure from three months to nine months after a soldier returns from service.

• FHA Modernization: Reforms to modernize, streamline and expand the reach of the FHA, allowing families in all areas of the country to access secure and affordable mortgages through FHA.

• Affordable Housing Fund: A new, permanent fund that will help create more affordable housing for Americans in communities across the country.

• Enhancing Mortgage Disclosure: To ensure that consumers know the exact amounts of their mortgage payments, including the maximum possible payment under the terms of the loan and changes in payments associated with adjustable rate mortgages, lenders will be required to provide borrowers with more timely and meaningful mortgage disclosures on all home purchase loans, loans that refinance a home, and loans that provide a home equity line of credit.

• Standard Property Tax Deduction: To make tax relief available to all American homeowners, the bill will provide a standard deduction -- $500 for single filers and $1,000 for joint filers -- for the 28.3 million non-itemizers who pay property taxes. Present law allows only those who itemize deductions on their federal tax returns to deduct state and local property taxes from their income.

• Mortgage Revenue Bonds: To provide for refinancing of subprime loans, mortgages for first-time homebuyers and multifamily rental housing, $11 billion of Federal tax-exempt private activity bond authority is included in this bill.

• Credit for First-Time Homebuyers: The bill includes a refundable tax credit that is equivalent to an interest-free loan equal to 10 percent of the purchase of the home (up to $8,000) by first-time homebuyers to help reduce the existing stock of unoccupied housing.

• Increase in low-income housing tax credit: The Low-Income Housing Tax Credit program helps finance the development of rental housing for low-income families. Under current law, there is a state-by-state limit on the annual amount of federal low-income housing tax credits that may be allocated by each state. The bill would increase these limits.

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