An excellent recent article over at CNNmoney.com briefly overviewed the important parts of the new foreclosure prevention bill the congress has been cooking up this week. Here are some excerpts (italics are mine to emphasize key parts):
Congress isn’t done debating how best to stem the foreclosure crisis, but one near-certainty has emerged: Lawmakers will pull together a housing bill that expands Washington’s role in helping troubled borrowers.
Key legislators, Bush administration officials, banking regulators and the presidential candidates have lined up behind the idea of letting the Federal Housing Administration back new loans for homeowners at risk of foreclosure.
Several plans have been proposed. All of them would let the FHA insure mortgages for troubled borrowers whose lenders voluntarily write down loans to an affordable level. Once refinanced, the loans could be sold to investors, which in turn could grease the wheels of the mortgage market as a whole.
….The leading Democratic plan - from House Financial Services Chairman Barney Frank, D-Mass. - is the most ambitious one proposed. It would let the government back as much as $300 billion in new loans if lenders reduced the mortgage principal owed to no more than 85% of a home’s appraised value.
The Frank bill is expected to be approved by the Financial Services committee next week and likely will go to a full House vote by the first week in May said Andrew Parmentier, a managing director and policy analyst for Friedman, Billings, Ramsey & Co.
Parmentier expects the House to overwhelmingly approve Frank’s rescue plan and he predicts it will then go straight to conference negotiations with the Senate to hammer out the differences.
…
While critics worry that an FHA rescue plan could amount to a bailout, supporters say it’s not since everyone involved - lenders, borrowers and mortgage investors - would make a sacrifice.
* Lenders get 100% backing from the FHA if a loan goes south. In exchange, the lender takes a “haircut” - reducing the principal owed and converting adjustable-rate loans to fixed-rate mortgages.
* Borrowers get to keep their homes, but they would pay a premium to the FHA for the mortgage insurance and they would have to give a small portion of their equity to the FHA when the house is sold. They would also have to show they can afford the newly refinanced loan.
* Mortgage investors - while they would sacrifice some future income from loans that have been reduced - would have more confidence investing in the new loans since the refinanced loans will be affordable and the borrower therefore will be more likely to pay them back.…
Government risk will be a key area for compromise. To reach a deal, Seiberg said, negotiators must accomplish two things. First, make sure lenders give up enough principal so the government isn’t subsidizing them. And second, make sure borrowers pay enough - in premiums to the FHA and in equity to the government when they sell the house - to give the program the best chance of paying for itself.
Stay tuned folks. This debate is huge for those of you who can’t yet get even an FHA loan because you are upside down.
