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Builders See Further Headway on Mortgage Credit Crunch
Following adoption of policy at last month’s fall board meeting in Seattle calling for prompt action in Washington to ease the mortgage credit crunch, several NAHB-supported proposals are in the pipeline to increase liquidity for the nation’s mortgage markets, develop solutions to subprime and foreclosure problems and stabilize financial markets.
“Much has happened since our board set forth its marching orders,” NAHB President Brian Catalde said in an Oct. 16 memorandum to the association leadership. “The Federal Reserve Board has cut interest rates, Congress is moving several bills to help the housing market and ease the growing problem of home foreclosures, and federal regulators are providing Fannie Mae and Freddie Mac more flexibility to address the subprime crisis.
“Moreover, NAHB has updated and revamped its ‘Back to Basics Toolkit’ (nahb.org/toolkit) with a new Myth Buster section that debunks sensationalized and often false or misleading media reports about the nation’s housing finance system and housing market. It includes resources tailored for HBA leaders to help reassure the public and spur new home sales.” (To read more on myth busters elsewhere in this issue, click here.)
Federal Reserve Cuts Interest Rates
The Federal Open Market Committee on Sept. 18 announced that it was cutting its federal funds and discount rates by one-half of a percentage point, sending a strong signal to the financial markets and consumers that it intends to keep the economy moving forward, which is key to stabilizing housing.
By lowering borrowing costs, the Fed action is expected to help ease the credit crunch in mortgage markets and potentially forestall foreclosures on loans that are scheduled to reset in the near future, which would prevent homes from being returned to the market at a marked-down price. However, it will take about six months for the full effects of the rate cults to be felt by consumers.
In the weeks leading up to the Fed’s big announcement, NAHB’s Economics team provided the Fed with regular updates on the health of the housing sector and the need to act decisively to bolster housing and the economy.
In addition, Catalde led a delegation of a cross-section of builders who met with Fed Chairman Ben Bernanke on Sept. 5 to discuss the state of the nation’s housing industry. Bernanke heard first-hand accounts of how the sharp housing downturn was affecting NAHB members and their local economies and why bold action was needed to restore liquidity at the short end of the financial markets.
Catalde noted that the data provided by NAHB and the face-to-face meeting with Bernanke were no doubt a factor in the Fed’s decision to move aggressively to ease monetary policy.
OFHEO Provides Modest Boost to GSE Portfolio Limits
On the regulatory front, the Office of Federal Housing Enterprise Oversight (OFHEO) announced on Sept. 19 that it will allow both Fannie Mae and Freddie Mac to raise their portfolio limits by 2% annually so that they can invest more than $20 billion in subprime mortgages.
“Though this is a positive step forward, it falls short of what we asked for and what we believe is needed,” Catalde said following the OFHEO announcement. “NAHB has been pushing — and continues to push — for OFHEO to allow both Fannie and Freddie to raise their portfolio cap by 10% to buy more subprime loans, to help keep borrowers from foreclosure and to keep mortgage money flowing.”
Agreeing with NAHB on the need to act now, lawmakers in both chambers of Congress recently announced they would introduce legislation to temporarily increase caps of the two housing government-sponsored enterprises’ (GSEs) portfolios by 10%.
Bills Would Help Subprime Borrowers
On Capitol Hill, the House has recently approved two bills that address NAHB policy concerns — FHA reform (H.R. 1852) and mortgage debt forgiveness (H.R. 3648) — and other legislation is pending in Congress that would give Fannie Mae and Freddie Mac greater flexibility to help creditworthy subprime borrowers to refinance out of their ARM loans.
Sen. Charles Schumer (D-N.Y.) announced on Oct. 11 that he plans to unveil legislation shortly that would allow Fannie Mae and Freddie Mac to expand their mortgage portfolios by 10% for six months, to help bring stability to the mortgage markets and provide additional capital to support refinancing efforts. The portfolio increase would amount to about $150 billion. House Financial Services Committee Chairman Barney Frank (D-Mass.) indicated that he will introduce a companion bill in the House.
Under the Schumer proposal, 85% of the increase (approximately $125 billion) would be required to fund refinancing of subprime borrowers. The proposal is a targeted and scaled-back version of a similar bill that Schumer offered last month. Schumer said that he plans to attach his legislation to “the first available legislative vehicle.”
Schumer’s plan is similar to bipartisan legislation introduced on Oct. 10 by House Financial Services Committee members Melissa Bean (D-Ill.) and Randy Neugebauer (R-Texas) that would allow Fannie Mae and Freddie Mac to expand their mortgage portfolios by 10% for one year to help subprime borrowers refinance mortgages that could become burdensome when the interest rate is reset and monthly payments increase significantly. This bill, like the legislation outlined above, is one of the policy provisions adopted at the NAHB fall board meeting on Sept. 8.
FHA Reform Sails Through House
By a strong bipartisan margin of 348 to 72, the House on Sept. 18 approved Federal Housing Administration (FHA) reform bill H.R. 1852, the Expanding American Homeownership Act of 2007. “This legislation is an important step forward to address problems in the subprime mortgage market and to help creditworthy borrowers obtain home loans at prices and terms they can afford,” Catalde said.
Prior to the vote in the House, lawmakers approved an NAHB-supported amendment by Reps. Barney Frank (D-Mass.), Gary Miller (R-Calif.) and Dennis Cardoza (D-Calif.) that would enable more creditworthy borrowers to purchase an FHA-insured home in many high-cost metropolitan markets.
A companion FHA reform bill was approved by the Senate Banking Committee on Sept. 19, where the real challenge is to move this legislation quickly. “We will be pushing hard to get this bill to the Senate floor as soon as possible,” said Catalde.
Debt Forgiveness Bill Easily Clears House
Addressing the subprime lending crisis, the House on Oct. 4 approved legislation by an overwhelming 386-27 vote that would eliminate any taxes home owners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. The change in the tax law would cap untaxable forgiven debt at $2 million and apply only to principal residences.
“This legislation will play a central role in helping American families avoid foreclosure and stay in their homes,” said Catalde.
Existing tax rules under Section 108 of the Internal Revenue Code impel many struggling home owners to seek foreclosure over restructuring their loan with lenders because forgiven mortgage debt is taxed as ordinary income.
H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, would remove this tax burden on mortgage indebtedness, encourage market-based restructuring between lenders and home owners and discourage foreclosures, said Catalde.
In other congressional action, the House on Oct. 10 approved H.R. 2895, the National Affordable Housing Trust Fund Act of 2007. The legislation, which passed by a vote of 264 to 148, would provide grants and other assistance to support producing, rehabilitating and preserving 1.5 million affordable housing units over the next 10 years.
The fund would be financed by part of the FHA’s mortgage lending surpluses (under H.R. 1852) and from a portion of the portfolios of Fannie Mae and Freddie Mac (H.R. 1427). At this point, no comparable legislation has been introduced in the Senate.
‘HOPE NOW’ to Aid Distressed Borrowers
To help home owners facing foreclosure, the Administration on Oct. 10 introduced a new government program to assist distressed borrowers. Announced by Treasury Secretary Henry Paulson and HUD Secretary Alphonso Jackson, “HOPE NOW” brings together foreclosure prevention counselors, mortgage servicers and other mortgage market participants to help home owners who are facing default avoid foreclosure and stay in their homes.
NAHB has strongly encouraged and supported recent efforts of the mortgage industry to provide foreclosure prevention counseling and assistance to borrowers who have encountered mortgage difficulties. A hotline established to assist borrowers facing foreclosure has been publicized through NAHB’s Web site and in communications to the association’s more than 800 state and local home builders associations.
It is expected that the HOPE NOW Alliance will greatly expand the capacity, coordination and effectiveness of existing outreach efforts.
“While we have made significant progress, it is important to note that this is going to be a long, tough battle,” Catalde said. “NAHB will continue to work steadfastly until the housing market turns around.”
NAHB members can click here to view Catalde’s memo to the NAHB leadership updating the association’s efforts to address the mortgage credit crunch.
To read legislation, click here and enter the bill number in the box at the center of the page.
For more information, e-mail Michael Strauss at NAHB, or call him at 800-368-5242 x8252.
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