RealtyTrac estimates that 1 in every 171 United States households were in the process of losing their home – up 121% on last year. To give some perspective on that number, RealtyTrac estimates that almost 740,000 United States homes entered the foreclosure process in the second quarter of 2008. That number includes receiving a default or bank repossession notice or warning of an impending auction. That is an incredible number for three months.
Not surprisingly, the worst hit areas were Nevada, California, Florida and Arizona, which had seen the biggest house price rises during the boom years, and the largest volume of sub-prime lending. Indeed, California had the most filings – 202,599 – which was up 198% from the same period a year ago.
In response to the worsening foreclosure crisis and credit crunch, both the House and the Senante approved a housing bill – The American Housing Rescue and Foreclosure Prevention Act of 2008 – that will provide mortgage relief for 400,000 struggling homeowners. The housing plan is aimed in large part at calming the financial markets, which have been riding a roller coaster of late, due in no small part to concerns over the financial stability of Freddie Mac, Fannie Mae, and the banking industry as a whole.
Despite an early veto threat, President Bush said he will sign the bill promptly. President Bush opposed the bill because he claimed that $3.9 billion in proposed neighborhood grants did nothing to help homeowners. President Bush had objected to the neighborhood grants, which would be for buying and fixing up foreclosed properties, saying that they were aimed at helping bankers and lenders, not homeowners who are in trouble.
The bill headed for the President’s signature aims to spare an estimated 400,000 debt-strapped homeowners from foreclosure by allowing them to get more affordable mortgages backed by the Federal Housing Authority ("FHA"). The FHA could insure $300 billion in such mortgages. However, banks would first have to agree to take a large loss on the existing loans in exchange for avoiding costly foreclosures.
The bill also seeks to overhaul FHA by requiring lenders to show how high a borrower’s payment could get under the terms of his mortgage. The bill also provides $180 million in pre-foreclosure counseling for struggling homeowners.
EASING THE CREDIT CRUNCH
The bill also is designed to relieve a broader credit crunch that has taken hold because of rising defaults and falling home values. To free up safer and more affordable mortgage credit, the bill permanently would increase to $625,000 the size of home loans that Fannie Mae and Freddie Mac can buy and the FHA can insure. They also could buy and back mortgages 15 percent higher than the median home price in certain areas.
The Treasury Department will also gain unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or buy their stock should they need it. The Federal Reserve will also more actively oversee the two mortgage giants.
The bill also includes $15 billion in tax cuts, including a significant expansion of the low-income housing tax credit and a credit of up to $7,500 for first-time home buyers for houses purchased between April 9, 2008, and July 1, 2009. The bill also allows people who don’t itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes. That chiefly benefits homeowners who have paid off their homes and can’t claim a deduction for mortgage interest.
Democratic leaders also tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt, which clearly irked many conservative Republicans. Those same Republicans were vehemently opposed to the bill, particularly the help for Fannie Mae and Freddie Mac. Many argue that the companies enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.
The Congressional Budget Office ("CBO") announced that the bailout plan could cost the government $25 billion over two years. Hard to argue that US taxpayers are not once again on the hook for a significant bailout. The difficult part in all this is to identify what the alternative is. All this "propping up" lenders and "calming" the markets gives one the feel that this is all a delicate house of cards just waiting to fall. We shall see.