Housing Bill Would Aid Struggling Homeowners

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The housing bill that has passed the House would help struggling homeowners with new, more affordable mortgages. The measure would keep them from losing their homes through foreclosures and would require the cooperation of their current lenders.

MELISSA BLOCK, host:

Now, NPR's John Ydstie is here to help us understand the details of this huge housing bill - especially what's in it for homeowners. Hi, John.

JOHN YDSTIE: Hi.

BLOCK: And let's talk what's in this - about what's in this bill for homeowners who are facing the prospect of losing their homes. What's in it for them?

YDSTIE: Well, the aim of the bill is to provide these struggling homeowners with new, more affordable mortgages, and to keep them from losing their homes through foreclosure. But here's the key: It requires the cooperation of their lender, their current lender. It would work like this - and we're going talk some numbers, here, so you might want to get out your…

BLOCK: Okay.

YDSTIE: …pencil and paper. The lender would have to agree to write down the value of the original loan to 90 percent of the home's current value. Now think about it. That could represent a big loss. First of all, remember that banks gave many homeowners mortgage loans worth 100 percent of the home's value back in the days of the housing boom. Second, those homes might now have fallen 10 to 20 percent in value in some markets. So lenders are going to have to be ready to take some big losses if this program's going to work.

BLOCK: Okay, my pen is out. Give us an example, John. Let's talk about a specific home and a specific value.

YDSTIE: Okay. Let's say a homeowner bought a house for $200,000, and let's say they got a 100 percent loan. But the home's value has dropped 10 percent, a drop of $20,000, right?

BLOCK: 180,000, we're down to.

YDSTIE: So we're down to $180,000. So the lender would have to agree to make a new mortgage that would be 90 percent of the home's current value, or about $160,000. Now going from $200,000 to $160,000 mortgage means the struggling homeowner is going to be more likely to make the monthly payment. But the bank has lost almost $40,000 in this transaction.

BLOCK: So why would a bank do that? Why would they agree to a loss like that?

YDSTIE: Well, first of all, foreclosure is very costly, and it's very likely a bank could lose many more thousands of dollars if they chose that route. The other thing is that the banks - that's in the bank's interest is that the new loan is guaranteed by the FHA, the Federal Housing Administration. So if the homeowner fails to pay, the government makes good on the mortgage. But to participate, lenders would also have to pay an upfront cost of 3 percent of the home's value, so there's another cost for the lender.

BLOCK: Now, which homeowners would qualify for this program, John?

YDSTIE: Well, you've got to be a full-time resident of the home. No investors are welcome. Lawmakers have made it clear they don't want to bail out speculators. Also, the homeowner's annual mortgage payment under the new loan has to be equal to no more than a third of their annual income. And in addition, homeowners will have to pay an annual premium for this FHA insurance.

One other thing: They'll also have to agree to share any future profits they make on the sale of their home with the government. If they sell in the first year of the new mortgage, for instance, they have to give 100 percent of any profit to the government. After that, the number drops off.

BLOCK: Now, the sponsors of this bill say that at least 400,000 homeowners will benefit. Now give us some context for that. Will that make a dent - a big dent in the number of foreclosures right now?

YDSTIE: Well, the forecasts are that before the end of this crisis, we could have 300 million or more foreclosures.

BLOCK: You said 300 million?

YDSTIE: I meant 3 million.

BLOCK: Three million. Okay. I was going to get really scared there for a minute.

(Soundbite of laughter)

YDSTIE: That means all of us. No. Three million. So 400,000 is just a little more of than a 10th of the people in trouble. But even the 400,000 may be optimistic. The Congressional Budget Office predicts the number could be closer to 300,000. And one problem is the program won't get under way until October 1st, and there are a million-and-a-half subprime borrowers who are - whose interest rates are going to adjust upward in 2008, so a lot of this target group will already be foreclosed on before the program starts.

BLOCK: Now, I gather this bill allows the FHA to guarantee $300 billion in loans like this, but that doesn't mean that it's going to actually cost the government $300 billion. That's not the price.

YDSTIE: No, no, no. Three hundred billion is the total value of all the mortgages guaranteed. It could only be the cost of the program if all the homeowners defaulted and the value of all the homes went to zero. And this is a bad housing market, but not that bad. Actually, the CBO estimates that the cost of this program is less than a billion dollars over 10 years. And the supporters of the bill point out that the first couple of years, this program will be paid for by Fannie Mae and Freddie Mac with fees that were supposed to go to an affordable housing trust. And that'll cover about half the cost of the program.

BLOCK: Okay. Fannie and Freddie, another big part of this bill would give the government authority to prop up Fannie and Freddie with huge infusions of cash. How would that help homeowners? Apart from helping Fannie Mae and Freddie Mac, how does it help homeowners?

YDSTIE: Well, not - it wouldn't help them directly. But indirectly, it should help stabilize the housing market and prop up housing prices. Really, Fannie and Freddie and the FHA are the only players left in the secondary housing market - that is, buying mortgages from lenders and thereby resupplying them with funds that they can lend for more mortgages. So steadying Fannie and Freddie indirectly benefits struggling homeowners. Of course, it also benefits Fannie and Freddie shareholders and bondholders who aren't necessarily deserving of government support.

BLOCK: Okay, John, thanks so much.

YDSTIE: You're welcome.

BLOCK: That's NPR's economics correspondent, John Ydstie.

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Understanding The Housing Bill

The Senate is expected to clear a sweeping housing bill Saturday and send it to the president for his signature. The legislation would address the home-foreclosure crisis and shore up the government-sponsored mortgage giants Fannie Mae and Freddie Mac. The House passed the bill Wednesday by a vote of 272-152.

A look at what the bill would do:

— Give the Treasury Department the power to extend Fannie Mae and Freddie Mac an unspecified line of credit and to buy their stock, if necessary, to prop up the mortgage companies. The two companies back or own $5 trillion in U.S. mortgages — nearly half the nation's total.

— Allow qualified homeowners facing foreclosure to apply for lower fixed-rate, 30-year mortgages backed by loan guarantees from the Federal Housing Administration. The original lenders would have to agree to take a loss on their loans.

— Create an independent regulator to oversee Fannie Mae and Freddie Mac. The regulator could establish minimum capital requirements for the two companies and limits on their portfolios. It would also have approval power over the pay packages of Fannie Mae and Freddie Mac executives.

— Provide $3.9 billion in grants to communities with the highest foreclosure rates to buy foreclosed and abandoned properties.

— Give about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time homebuyers who bought homes between April 9, 2008, and July 1, 2009.

— Put a cap of $625,500 on the loans Fannie Mae and Freddie Mac can buy in certain high-priced areas, and a cap in other areas of up to 15 percent above the median home price.

— Count any federal infusion for the mortgage giants under the debt limit, essentially capping how much the government could spend to stabilize the companies without further approval from Congress. As of Tuesday, the national debt that counts toward the limit stood at about $9.5 trillion, roughly $360 billion below the statutory ceiling.

Material from The Associated Press was used in this report.

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