In a rare Saturday morning vote, the U.S. Senate cleared significant legislation aimed at providing foreclosure relief, shoring up the financial condition of the nation's largest mortgage lenders, and providing close to $4 billion in new community investment funds. The President is expected to sign the "Housing & Economic Recovery Act of 2008" (HR 3221) by midweek, bringing to a close nearly three months of political and substantive negotiation over the final scope of the rescue package.
There are several key aspects of the rescue plan. These include:
- Foreclosure Prevention - based on estimates from analysts, it is anticipated that up to 400,000 homeowners will be able to take advantage of a plan to allow lenders to secure a government guarantee of their mortgage loans in exchange for accepting a revised appraisal and immediate writedown of their loans to 90 percent of the new appraised value. Under this plan, homeowners would share the remaining equity with the federal government, and would be required to rebate any gains from the sale of their home to the Federal Housing Administration (FHA) on a sliding scale over five years. This plan is coupled with protection from investor lawsuits for the write-downs incurred by lenders that participate in the program. In addition, the legislation increases the current FHA loan caps to a maximum of $625,000 in high cost areas. The final bill also includes $180 million in funding for foreclosure counseling and legal assistance to borrowers.
- Federal Investment - In response to growing market concern over the financial stability of the nation's two largest mortgage lenders, the legislation allows for unlimited federal purchase of the equity of both Fannie Mae and Freddie Mac as necessary to ensure that the two government sponsored enterprises (GSE's) remain capable of meeting obligations. This provision was the subject of intense negotiation and dispute, and ultimately resulted in substantial delays in securing passage of the bill. Estimates by the Congressional Budget Office suggest that this exposure could reach a maximum of $100 billion if needed, and as a result Congress increased the federal debt ceiling to accommodate passage of this bill.
- Housing Regulation and Oversight - building on proposals that have been circulating for the past several years, the legislation couples new lending authority with enhanced regulation of the mortgage industry at the federal level. The bill creates a unified housing regulator with responsibility for oversight of both the FHA and the two GSE's, including the responsibility for authorizing executive compensation at Fannie Mae and Freddie Mac. The bill also mandates that "seller financed" downpayments be eliminated as an aspect of FHA-approved loans by October 1, 2008, and prohibits FHA from charging risk premiums for buyers until October 1, 2009.
- Tax and Investment Provisions - HR 3221 contains a wide ranging series of tax provisions related to the homebuying and community investment. Despite an early threat of a Presidential veto, House and Senate negotiators insisted on including nearly $4 billion in new community development block grant funding for municipal entities to purchase foreclosed properties and rehabilitate them for resale. The bill also includes $11 billion in tax-free municipal bond authority for low-interest loans to first-time home buyers, construct of low-income rental housing and refinance subprime mortgages.
Other key tax provisions include:
- Establishing a tax credit of up to $7,500 for first-time home buyers who purchase residences between April 9, 2008, and July 1, 2009.
- Creating a new standard deduction of $500-$1,000 for property taxes for tax payers that do not itemize.
- Low Income Housing Provisions - In addition to the homebuyer and homeowner credits, HR 3221 contains a series of legislative changes to the Low Income Housing Tax Credit (LIHTC) program. The bill includes a number of important provisions intended to clarify the operation of the low-income housing tax credit and increase the efficiency of the tax credit market, including:
- Exempting LIHTC investments from the alternative minimum tax
- Temporarily fixing the annual Housing Credit percentage at nine percent
- Repealing the requirement of posting a bond with the IRS upon disposition of a low-income project
- Allowing states to specify certain types of project for an enhanced credit
- Allowing the combination of below-market federal financing (other than tax-exempt bonds) and tax credits and easing the restrictions on federal grants
- Requiring the consideration of historic nature and energy efficiency in the tax credit allocation process
- Simplifying the calculation of the credit and certain allocation requirements
- Conforming the tax credit and low-income housing bond compliance rules in a number of areas.
This legislation is intended to bring both long-term and immediate relief to the housing market through both financial incentives and comprehensive regulatory overhaul. As new regulations are developed and the new oversight authority takes the reins of the federally-backed mortgage market, those who interact with these entities should expect both subtle and potentially substantial process changes -- particularly in 2009 with a new President and new Congress