A bipartisan foreclosure relief bill put forward for debate in the Senate Thursday would permanently increase the limits for Federal Housing Administration loan guarantee programs, but did not include an ambitious plan to allow the FHA to help refinance up to 2 million troubled loans when lenders agree to write down their value.
The version of the Foreclosure Prevention Act of 2008 put forward for the Senate to debate would increase FHA loan limits from 95 percent to 110 percent of median home price, with a cap of 132 percent of the conforming loan limit ($550,000 under the current $417,000 conforming loan limit). The compromise bill would require 3.5 percent down payments for any FHA backed loan.
Although Congress and the Bush administration have approved temporary increases in the conforming loan and FHA loan limits to $729,750 in high-cost markets, the limits will expire at the end of the year.
The House and Senate had previously passed FHA modernization bills that would put in place permanent loan-limit increases and lower down-payment requirements, but differences in the bills have not been reconciled.
The Bush administration had backed the Senate’s previous FHA modernization bill, which would have lowered minimum FHA down-payment requirements from the current 3 percent to 1.5 percent. The FHA modernization bill approved by the House would have eliminated down-payment requirements in some cases.
Other elements of the compromise bill worked out by Senate Banking Committee co-chairs Sen. Chris Dodd, D-Conn., and Richard Shelby, R-Ala. as a starting point for debate included:
- $10 billion in mortgage revenue bonds to refinance subprime loans, mortgages for first-time home buyers and multifamily rental housing.
- $4 billion in supplemental Community Development Block Grant Funds for the purchase, rehabilitation or redevelopment of foreclosed home to stabilize neighborhoods and stem the significant losses in house values of neighboring homes.
Tax breaks:
- Standard property tax deduction of $500 for single filers and $1,000 for joint filers (Present law allows only those who itemize deductions on their federal tax returns to deduct state and local property taxes from their income).
- Net operating loss carryback for home builders and other businesses. Bill would extend a law allowing corporations to apply excess net operating losses to tax returns from prior profitable years and receive any applicable refunds. For 2008 and 2009 losses, the provision would extend the "net operating loss (NOL) carryback" to four years (back to 2004 and 2005, respectively) from the two years currently in law.
- Tax credit for purchase of homes in foreclosure. To encourage the purchase of homes already in foreclosure and of homes on which foreclosure has been filed, the bill would create a $7,000 tax credit to be claimed over two years.
Counseling and disclosures:
- $100 million for pre-foreclosure counseling for up to 250,000 additional families, to be distributed by the Neighborhood Reinvestment Corp. by the end of 2008.
- New mortgage disclosures, to be provided no later than seven days before closing, informing borrowers of the maximum monthly payments possible under their loan, and doubling the range of statutory damages for Truth in Lending Act violations to between $400 and $4,000. The bill would expand the types of home loans subject to early disclosures (within three days of application) under TILA.
- Protection for veterans. To help returning soldiers avoid foreclosure, the bill would lengthen the time a lender must wait before starting foreclosure from three months to nine months after a soldier returns from service and provide returning soldiers with one year relief from increases in mortgage interest rates. Another provision would increase VA loan guarantee amounts.
The National Community Reinvestment Coalition panned the compromise bill put forward for debate, saying the government should create programs that use federal funds to encourage the modification or refinance of troubled loans, and give bankruptcy judges the power to modify the terms of bankrupt borrowers’ mortgages.
Rep. Barney Frank, D-Mass., has proposed authorizing the FHA to help refinance up to 2 million loans in cases where lenders agree to substantial principal write-downs (see Inman News story). Dodd has proposed a similar plan, but neither was included in the compromise bill worked out by Dodd and Shelby as the basis for Thursday’s Senate debate.
Dodd and Shelby also left out language to allow bankruptcy judges to reduce the principal of loans when debtors owe more than their homes are worth — a move lending industry opponents argue would raise borrowing costs for all home buyers. The Bush administration has threatened to veto a bill that contains bankruptcy "cramdown provisions, and the issue led Republicans to block consideration of an earlier version of the bill on Feb. 28 (see Inman News story).
Sen. Richard Durbin, D-Ill., attempted an amendment to restore bankruptcy cramdown provisions to the bill, but the proposal was tabled in a 58-36 vote.
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