BluefoxToday blog : Housing rescue bill almost a reality

Housing rescue bill almost a reality

Washington has been hard at work for a while on this huge housing rescue legislation - it'll provide $300 billion to distressed homeowners who face a possible foreclosure - and it passed the House this week. Once it gets the blessings of the Senate and the White House, it'll become law, which it is expected to do soon. Besides coming to the aid of financially-hurting homeowners, it'll also extend a helping hand to the ailing mortgage heavyweights Fannie Mae and Freddie Mac, something they both badly need.

The bill includes a lot of rules about all sorts of things, as it should so everything is as clear as possible. One area that caught my eye is the cost to the borrower.

To start with, under the legislation eligible homeowners can refinance their high-cost old mortgages to new, lower-cost fixed-rate home loans insured by FHA, or Federal Housing Administration. FHA will charge each borrower 1.5% of the principal amount each year as an insurance premium. That in itself is pretty much in line with what FHA is currently doing with their standard programs.

Here comes the intriguing part that gets everyone talking. It involves profit sharing on any future price appreciation. When the home is sold or refinanced, the owner is to pay FHA a "3% exit fee" based on the remaining principal. There is more. If the owner sells or refinances within the first year, he'll have to dish out to FHA 100% of any profits. In other words, all the potential gain is gone, less the cost of sales. During the second year the owner would owe FHA 90% of any profits and the third year it would be 80% and go down 10% each year until it reaches the fifth year when the percentage is 50 and then it would remain there for the duration.

The legislation is designed to assist homeowners who find themselves on the edge and for those who qualify, it'll accomplish its mission. But as is evident from the cost scenario, FHA will seemingly collect enough premiums and potential profit margins to cover any future loan losses, which it should do so it won't become a direct taxpayer burden. The plan, however, relies heavily on the real estate market recovering nicely in the coming years. It'll probably do so, at least in the faster-growth areas and the higher premiums and profits they collect there would then be used to cover mortgage losses in the slow-growth regions. From this cost angle alone, the program is very workable.




Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 14 commentsEsko Kiuru • July 24 2008 11:59PM


That actually makes sense.  I can not believe that came through the Congress.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) almost 12 years ago

Wow Esko, I guess I didn't know about those conditions in the bill. That way, the people that don't pay and get bailed out, do not profit on the short run, right?

Posted by Fred Chamberlin, Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant (Guild Mortgage Co - Oak Harbor WA) almost 12 years ago

Esko this could be a big motivator for first time home buyers, because they could actually walk away with a refund check on their income taxes because of this. 

For example with a tax credit, you subtract the credit amount from the total you would otherwise pay to the IRS. So if you owe $1,500 and you qualify for the credit, you would end up getting a $6,000 refund, or if you were already getting a refund then you would add the $7,500 on top of it.

But there is a catch, and that is that they have to pay back the credit over the next 15 years, in equal amounts each year when they pay their federal taxes. So that makes this more like an interest-free loan than a true credit.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 12 years ago


This part of the package does make sense.

Posted by Esko Kiuru almost 12 years ago


The intent evidently is to keep potential abusers at bay.

Posted by Esko Kiuru almost 12 years ago


That sort of setup should give first-time buyers added motivation.

Posted by Esko Kiuru almost 12 years ago

this will probably work about as well as fha secure, not well at all.

doesn't it require a substantial reduction of the current outstanding balance which must be agreed to by the current mortgage holder.

did anyone ask these mortgage holders if they were willing to do this.

or is this just politics as usual? 

Posted by Jay Beckingham, Seniors ROCK! (SWBC MOrtgage) almost 12 years ago


The cost to the borrower section attempts to keep the taxpayer as much as possible out of the picture.

Posted by Esko Kiuru almost 12 years ago

I think this is a great way to structure the bill. Although many are trying to poo-poo it for the imperfections it most certainly has...what I have read thus far seems overall very good considering the amount of time that was available to put it together!

Posted by Christina Ewing (Perl Mortgage ) almost 12 years ago

The government bail out just about always end up in a lost of the taxpayers money. If real estate doesn't come back in the next few years handsomely, then the quasi government agencies shall keep hemorrhaging. I know we want people to stay in their homes, however, if they truly can't afford it we are prolonging the agony and making the problem worse. The soon the banks can finish up dropping their bad paper the sooner we can get the economy going again.

In Japan they let banks hold on and they were in deflation for over 15 years.

Investor confidence is needed. A bail out only sends good money after bad.


Posted by Richard Stabile, Bergen County New Homes Builder Realtor (Re/Max Real Estate Limited) almost 12 years ago


Thanks for providing insight into this provision. It is somewhat difficult to find out much beyond the headline features of the bill.

There is some much in it, and its effective date is fast upon us. I think it will be weeks before we know most of the impacting details.

There are also provisions for second mortgage lenders who are left out in the bailout refinances to participate a little in the property appreciation. I wonder how they are impacted by the number of years the property is held.


Posted by Richard Byron Smith, NMLS #184479, Mortgage Loan Officer (Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289) almost 12 years ago


The bill certainly has some good in it.

Posted by Esko Kiuru almost 12 years ago


We definitely should stay away from the Japanese model.

Posted by Esko Kiuru almost 12 years ago


The bill has lots of details that'll take days to figure out, if anyone wants to do so.

Posted by Esko Kiuru almost 12 years ago