That wasn't so hard, was it? It only took the worst real estate slump in a generation, an economy grinding to a department-of-motor-vehicles pace, and a crisis of confidence in the heart of the mortgage finance system to get the gigantic housing bill to the finish line. The legislation, which has been signed into law by President Bush, is hugely ambitious, seeking at once to stem the tide of home foreclosures and restore confidence in mortgage finance giants Fannie Mae and Freddie Mac. To critics, it's a bailout. To supporters, it's a rescue. But no matter what you call it, it is the most sweeping housing measure in decades. Here's how it will affect you:
Struggling homeowners: A key provision of the law would allow homeowners who can't make their mortgage payments to refinance into more affordable, fixed-rate loans insured by the federal government. Under the plan, the Federal Housing Administration can guarantee up to $300 billion of such loans, enough to modify an estimated 400,000 mortgages. To participate, lenders would have to write down the original loan balance, taking a financial hit in the process.
"It's a help, but it's modest in comparison to the number of homeowners who are facing default and foreclosure," says Mark Zandi, chief economist of Moody's Economy.com. Zandi says the nation could face nearly 3 million first-mortgage defaults this year. Of those, as many as 1.5 million mortgage holders could lose their homes. "That 400,000 [of loans that will be modified under the law] is over the life of the program," Zandi says. "So I don't know if that provides much relief in 2008."
First-time home buyers: The housing law would also benefit first-time home buyers through a tax credit worth as much as $7,500. The credit, however, isn't a grant, but essentially an interest-free loan that must be paid back over 15 years. The outstanding balance must be paid back to the government if the property is sold for more than the original purchase price and the tax credit hasn't been fully repaid. James Glassman, a senior economist at JPMorgan Chase, says the tax credit is unlikely to increase demand from first-time home buyers all by itself. But when coupled with other factors—such as falling home prices—"it's just one more thing that helps," Glassman says.
Seniors: Although it has received little fanfare, a provision in the law that increases the limit on certain reverse mortgages stands to benefit senior citizens. A reverse mortgage is a type of loan—collateralized by a house—available to homeowners ages 62 and up. The loan allows homeowners to obtain monthly payments or a lump sum of cash based on the value of the property. The legislation boosts the cap on the Federal Housing Administration reverse mortgage program to as high as $625,000. "That's a benefit because it gives seniors the ability to access more equity out of their homes," says Darryl Hicks, spokesman for the National Reverse Mortgage Lenders Association.
Low-income Americans. The legislation also creates a permanent housing trust fund to benefit low-income housing. "The funds from the trust fund would be allocated to the states, which would use the money to produce and preserve affordable housing focused on the lowest-income households," says Linda Couch of the National Low Income Housing Coalition. "Low-income advocates see that section as a real victory." Couch says the fund could have as much as $600 million by 2011 from its original funding sources, Fannie and Freddie.
Prospective home buyers: The law could affect house hunters in a couple of ways:
Home prices: Although helpful, the legislation is unlikely to reverse the nationwide decline in home prices in the near term. "The impact will be more of stopping or slowing the hemorrhaging in the housing market rather than sparking some type of strong recovery," says Michael Darda, chief economist at MKM Partners. Still, in a real estate market with a glut of unsold homes, every little bit helps.
Interest rates: The housing package could result in more upward pressure on mortgage interest rates, which have been marching steadily higher in recent months. The average national rate on a 30-year fixed-rate mortgage climbed to 6.63 percent this week, up from 5.85 percent in late March, according to Freddie Mac. While inflation fears are the main factor pushing rates up,, Mike Larson, a real estate analyst at Weiss Research, says the government's efforts to stabilize Fannie Mae and Freddie Mac are playing a role as well. The legislation temporarily boosts the size of Fannie and Freddie's credit lines with the Treasury and allows the federal government to purchase equity in the two companies. It also creates a more powerful regulator for Fannie and Freddie.
Although Treasury says it has no current plans to use its new authority, the government is now explicitly guaranteeing the roughly $5 trillion of mortgages that Fannie and Freddie own or backstop themselves. And if the government did have to step in and bail out one of the government-sponsored enterprises, "we are going to have to fund it by selling more treasuries," Larson says. Issuing more government debt would increase the yield on the 10-year treasury note, thereby pushing up fixed mortgage rates. "The reality is there is no free lunch," Larson says.
All consumers: While the law may provide only modest help to individuals in trouble, its impact on the broader financial market is profound. The government's actions have made it clear that it will bail out Fannie and Freddie if they get into trouble, thereby easing concerns regarding the mortgage finance giants. "It's forestalled a crisis," Zandi says. "Without it, the mortgage [and] housing markets would have been pushed into turmoil and the system would have been a mess."
Still, even though bad home loans are at the root of the financial crisis, consumers should not expect the housing market—or the economy as a whole—to turn around overnight. "It's not a panacea," Zandi says. "It's not going to solve all the problems."
Updated on 7/30/2008