Housing and Economic Recovery Act of 2008

By Rob Morel on August 4, 2008

On July 30th new legislation was passed by the US government mainly to protect homeowners from foreclosure, stop declining home prices, and stabilize the mortgage industry. Since many people have been asking me about what this new legislation will actually do, I decided to write about three of the major provisions:

1. NEW CONFORMING LOAN LIMITS - Previously, the conforming loan limit for FHA and government-backed enterprises (Fannie Mae and Freddie Mac) was $417,000.  Now it is permanently raised up to the greater of $417,000 or 115% local area median home price, capped at $625,500 (beginning Jan 1st, 2009).  This means better interest rates for loans that previously would’ve been considered jumbo loans so buyers will be able to afford a higher priced home.  However, the minimum down payment required on an FHA loan has now been increased from 3% to 3.5% and effective October 1st, sellers can no longer assist buyers in down payments on FHA loans.  Assistance provided by nonprofits, such as family members, churches, or employers, are still OK. 

2. HOMEBUYER TAX CREDIT - A first-time homebuyer can receive a tax credit of 10% of the purchase price up to $7,500 maximum, for any qualified purchase between April 9, 2008 and June 30, 2009. The credit is repayable in equal installments over the next 15 years (making it essentially an interest free loan) unless the homebuyer sells the property for a gain and then the loan needs to be paid back immediately in full.  A buyer qualifies as a “first-time” homebuyer as long as the buyer or their spouse has not owned a principal residence in the U.S. for the last three years. So this provision will at least provide temporary relief for those who are really tight on money right now, but it’s no bailout. 

3. FHA FORECLOSURE RESCUE - For about 400,000 homeowners who have unaffordable mortgages and subprime loans, assistance is available to refinance and get new FHA-insured loans.  The original loans must have been originated before 2008 and the borrower’s monthly payment must be over 31% of their income as of March 1, 2008.  Lenders can write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. However, borrowers will have to share 50% of any equity realized through a subsequent sale or refinance with the FHA. The loan limit for this program is $550,440 nationwide and is set to go into effect on October 1, 2008 till September 30, 2011.  Even though the government is essentially bailing out these people, I’m for this assistance for two reasons.  First of all, the borrowers were probably victims of predatory lenders who did not explain fully how these loans work and are now stuck with a payment that they can not afford.  Granted, people should be more careful before they sign their names to binding contracts, there are a lot of stories I’ve heard of unscrupulous people who intentionally lied and withheld information in order to just make quick money off unknowing victims.  Secondly, even if the borrowers are at fault, they are right now faced with losing their homes to the bank and whatever we can do to stop more foreclosures coming on the market should be done.  Bank owned properties are usually not in the best condition and therefore require more repairs and updating, which now the buyer has to pay for.  The purchaser also has to sign the bank’s addendums waiving most of their rights and the property comes “as-is” with no warranties expressed or implied.  There is a misconception in the public that foreclosures are these great deals but in reality, to me, the trade off is not as valuable as a normal transaction.

There are many other provisions of this bill that creates new organizations, changes old rules, and shifts money around to various government authorities all in the name of “stabilizing” and “efficiency”, but I won’t bore you with those.  If you want to read the full bill you can do so here: http://www.thomas.gov/cgi-bin/bdquery/z?d110:HR03221:@@@D&summ2=m&