Housing law aims to help borrowers stay home

By Mary Ellen Podmolik

Published: August 9, 2008

CHICAGO — First-time home buyers have a better shot at the American dream and strapped homeowners may be able to stave off financial ruin under the new housing law.

But there are plenty of catches in the 694-page housing legislation.

The General Accounting Office has said the mortgage-relief facets of the legislation will assist 400,000 struggling homeowners nationwide.

Programs to keep homeowners in their homes by restructuring their loans could shrink the glut of houses on the market by lessening the number of pre-foreclosure and foreclosure sales.

But Mark Zandi, chief economist of Moody's Economy.com, estimates that there will be 3 million more mortgage loan defaults by the end of the year.

"It's not a miracle cure,” Zandi said. "It's one modest, positive step.”

Under the mortgage assistance program, qualified homeowners can seek to have their existing mortgages canceled and replaced with a 30-year fixed rate, Federal Housing Administration-backed loan, and for as much as 90 percent of the home's value. However, it is up to lenders to decide whether they will participate in the program and which homeowners they will help. Mortgage companies would wind up having to write off a portion of the existing loans.

The program, which will be available Oct. 1 through September 2011, is designed to benefit borrowers who spent more than 31 percent of their monthly incomes on their mortgages as of March 1 on loans that were written before Jan. 2 of this year.

The bill, known as the Housing and Economic Recovery Act of 2008, earmarks additional funds for groups such as Neighborhood Housing Services to hire more counselors to assist struggling homeowners.

The legislation also aims to turn more renters into homeowners by providing a temporary $7,500 tax credit to qualifying first-time home buyers who buy homes between April 9, 2008, and July 1, 2009. However, the tax credit must be repaid, either over 15 years or when the home is sold.

Carpentersville, Ill., resident Sherri Campbell has been looking to buy her first home for some time and would easily qualify for the tax credit. While she likes the theory of the tax credit, she's unsure whether she would seek it.

"It would be 100 percent ‘I'd take it' if I didn't have to pay it back,” she said. "I'm no dummy.”

The bill increases the loan limit for FHA-insured mortgages to a maximum of $625,000. At the same time though, the bill raises to 3.5 percent, from 3 percent, the amount of down payment a buyer must make to receive an FHA loan.

"Is it going to resolve everything? No, we were hemorrhaging. This is a good bandage,” said Paul Bertsche, vice president and general counsel at CA Development.

One other downside of the legislation from the home builders' perspective is the decision to no longer allow home sellers to offer down payment "gifts” to buyers who seek FHA loans.

McClatchy-Tribune Information Services

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