Foregoing a federal bail out of lenders, President Bush yesterday announced an aid package including help for an estimated 80,000 mortgage mangled homeowners to refinance to save their home.
The presidential package also seeks tax code changes to benefit homeowners who use a short sale to avoid foreclosure and Federal Housing Administration (FHA) reform. The plan also supports disclosure reform, counseling and education and stiffer enforcement of existing rules and regulations.
"Recent disturbances in the subprime mortgage industry are modest. They're modest in relation to the size of our economy, but if your family is one of those having trouble making monthly payments, this problem doesn't seem modest at all," Bush said during a White House press conference to announce the plan.
Given the delay in launching some components of the effort and legislative action necessary on others, the impact of Bush's plan is questionable for a national problem that begs urgency.
The key provision, FHA-Secure, doesn't require legislative action but isn't scheduled to launch immediately.
The FHA program allows homeowners saddled with certain adjustable rate mortgages (ARMs) -- who didn't miss any payments until after their interest rate adjusted upward -- to refinance mortgages of up to $202,000 in most states and up to $362,000 in high-cost states including California and New York.
To qualify, the homeowner must also have a 3 percent equity stake in their home. Their new mortgage will include federal mortgage insurance premiums based on the level of risk in the new loan.
Bush has also asked Congress to legislate an increase in FHA lending limits to $262,000 and $417,000 as well as further modernize the FHA. The Depression-era agency typically serves low- and moderate-income families and first-time buyers, but not delinquent borrowers.
Bush also wants Congress to change the federal tax code so forgiven debt in a "short sale" of a primary residence is not taxed as income.
Some homeowners opt for a short sale to avoid foreclosure, provided the lender agrees to write off a portion of a mortgage that typically is higher than the value of the home. Also the seller must have a buyer is ready, willing and able to make the purchase.
For example, is a mortgage and all pay off costs are $500,000, but the home sale brings in only $450,000, the lender forgives the $50,000 difference. However, in many cases, the forgiven amount is considered taxable income.
Legislation to change the tax code has been introduced in the both the Senate and House of Representatives.
Bush's plan also includes:
- A foreclosure avoidance initiative to help troubled homeowners find a way to refinance through a Housing and Urban Development (HUD) Department outreach effort involving groups already in the business of offering counseling services and mortgage assistance. Included is a Presidential Council on Financial Literacy to raise awareness of complicated mortgage finance issues.
- Support for improved mortgage disclosures already in the works by federal monetary regulatory agencies, reforms for the Real Estate Settlement Procedures Act (RESPA) to promote comparison shopping by consumers and stronger enforcement of existing regulations.
- A comprehensive, state-based mortgage broker and originator registration system for tighter controls over the industry.
- A Presidential Working Group on Financial Markets to examine the role of credit rating agencies and how securitization and repackaging and selling mortgages has changed the mortgage industry and related business practices.
Any cost taxpayers will have to pay for the new programs is currently unknown, but Bush was clear the plan isn't a mortgage industry bail out.
"I've made it a top priority to help homeowners so that as many families as possible can stay in their homes. The government's got a role to play, but it is limited. A federal bail out of lenders would only encourage a recurrence. It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford," Bush said.
