President Bush has asked for three things as of late regarding the weak housing market. Reform Fannie Mae and Freddie Mac, get revenue bonds for each state, and modernize the FHA. The House answered yesterday with a whopping vote in favor of the new FHA bailout program. It makes sense at every economic level, however President Bush said he will veto the bill when it comes across his desk. His solution is to call for revenue bonds in each state, to help out all of the distressed homeowners.
Much controversy is arising from this recent bill that the House has passed on, and many do not know why President Bush is going to veto this bill. With the proposed Bill, FHA would insure up to $300 billion in new loans over 4 years. Lenders would have to reduce mortgage principal for eligibility to 85% loan to value. If someone is under water on their mortgage in a declining market of 125%, they can refinance into an FHA loan at 85% loan to value. The lender who is holding the paper on the mortgage will take a hit on their profit, and overall, the cost will be about 2.7 billion to the lenders.
The upside of this, is that 500,000 foreclosures will be prevented, and$300 million has already been earmarked to combat mortgage fraud, and provide counseling. The cost to taxpayers however, is 1.7 billion, which many are not in favor of. Having all of these distressed homes refinanced to 85% should correct the market in may areas, however these borrowers will need to qualify under FHA guidelines. This will be a very hot topic on Wall Street this week, as many are speculating that this bill will still press forward, and win over the president eventually. A four year plan seems like a long enough time for the market to correct itself, especially if all of these distorted values will correct themselves through a refinance.
In closing, their needs to be a resolution to this mess eventually. People are continuing to turn in their keys, instead of their mortgage payments, which is starting to destroy neighborhoods and communities, continuing to devalue these properties across the country. FHA bailout is a huge step in combatting all these bad mortgages that are upside down, and also in aiding the homeowner to refinance into a more stable mortgage. Lenders cannot keep losing money, as 300 of them have already gone out of business since late 2006.
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