How the Housing and Economic Recovery Act affects homeowners

The Housing and Economic Recovery Act of 2008 designed primarily to address the subprime mortgage crises was approved by Congress on July 24. It authorizes the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers if lenders write-down principal loan balances to 90 percent of current appraisal value.

It’s intended to restore confidence in Fannie Mae and Freddie Mac by strengthening regulations and injecting capital into the two largest U.S. suppliers of mortgage funding.

Here are some frequently asked questions about the Housing and Economic Recovery Act, with answers from the U.S. Department of Housing and Urban Development:

• How will the law help struggling homeowners keep their homes?

Through the Federal Housing Administration, an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages. The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90 percent of the property’s current value.

• When will the program begin?

The program will begin on Oct. 1 and sunset on Sept. 30, 2011. Homeowners in danger of losing their homes before Oct. 1, however, should not wait to contact their loan servicers and should begin applying for federally insured mortgages now.

• Who is eligible?

To be eligible to participate in this program, a borrower must:

— Have a loan on an owner-occupied principal residence. Investors, speculators, or borrowers who own second homes cannot participate in this program.

— Have a monthly mortgage payment greater than at least 31 percent of the borrower’s total monthly income, as of March 1, 2008.

— Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently.

• How can a homeowner access this new program?

Homeowners or a servicer of an existing eligible loan need to contact an Federal Housing Administration-approved lender. The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program. If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage. Loans provided under this program must be 30-year fixed rate loans.

• Are lenders required to participate in this program?

No. The program is completely voluntary for lenders, investors, loan servicers, and borrowers.

• How does this law help neighborhoods that have been hit by the foreclosure crisis?

The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities and governments across the nation. The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties and stabilize the housing market.

• Will this law be a bailout for speculators, homeowners, investors, and lenders?

No. It is narrowly tailored to keep families in their homes. For example, only primary residences are eligible; no speculators, investment properties, or second or third homes will be refinanced.

Investors and lenders must take big losses first in order even to participate. The owner of the old mortgage can get a maximum of 90 percent of the current value of the home (which presumably will be considerably less than the value of the original loan). In many cases the loss will be significantly greater, but 10 percent is the minimum.

In addition, lenders must waive any penalties or fees, and help pay for the origination and closing costs of the new loans.

Most homeowners will have seen the equity in their homes disappear before being able to refinance under this program. In addition, the FHA will get a portion of any future profits on the house, to make sure the government recoups its investment over the long run.

• Will this law reward families who bought homes they could not afford?

Many homeowners facing foreclosure were misled, deceived or were in other ways the victims of unfair lending practices.

To prevent future abuses by lenders, this law will establish a nationwide loan originator licensing and registration system to set minimum standards for all residential mortgage brokers and lenders. It also strengthens mortgage disclosure requirements to help ensure that borrowers understand their mortgage loan terms.

• How will this law make it more affordable to own a home?

There are a number of provisions that will make homeownership more affordable:

— Creates a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years).

— Grants states $11 billion of additional tax-exempt bond authority in 2008 that they can use to refinance subprime loans, make loans to first-time homebuyers and to finance the building of affordable rental housing.

— Raises conforming loan limits for the FHA, Fannie Mae and Freddie Mac to $625,500. Because of the high cost of housing in California, a majority of the state’s residents were previously shut out from these programs. Raising these loan limits will lead to lower interest rates on some loans, greater refinancing opportunities and enable more borrowers in high cost areas to avoid the type of nontraditional and frequently abusive loans that led to the current crisis.

Provides couples using the standard deduction with up to an additional $1,000 deduction for property taxes ($500 for individuals).

• Does the law provide help to those who still cannot afford to own a home?

Yes. The bill includes a number of provisions to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis. For example, the bill creates a new permanent affordable housing trust fund — financed by Fannie Mae and Freddie Mac and not by taxpayers — to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.

In addition, the legislation provides a temporary increase in the Low-Income Housing Tax Credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.

As you can see, there is a great deal of information contained in this bill. For more information, call the state of Hawai‘i HUD office at (808) 522-8175 or visit

• The Kauai Board of Realtors is a nonprofit organization comprised of 700 Realtors and associates from the bank, mortgage and escrow industry. The board answers reader questions twice a month in the Business section. For more information, visit


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