As Housing Act Passes Congress, Questions Emerge

The Senate on Saturday morning passed The Housing and Economic Recovery Act of 2008, a sweeping aid package designed to help a growing number of troubled homeowners, in the hopes that the legislation might help calm financial markets that have been increasingly on edge throughout July. Senate members from both major parties overwhelmingly approved the bill 72-13 in a weekend session, after the House’s own approval earlier in the week. It now head to President Bush, who is expected to sign the bill with little fanfare; the White House has said it expects no formal signing ceremony for a piece of legislation that has been termed “the most important housing bill in a generation” by Mortgage Bankers Association chairman Kieran Quinn. Among the bill’s key centerpieces are provisions which would authorize the Federal Housing Administration to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; lenders and investors must, however, first write-down principal loan balances to 90 percent of current appraisal value. The bill will also provide vast new authority for the U.S. Treasury to backstop the continuing operations of both housing GSEs Fannie Mae (FNM) and Freddie Mac (FRE). Ready by October? The bill will not go into effect until October 1, and on Friday House Financial Services Committee chairman Barney Frank (D-MA) warned servicers that they needed to halt foreclosure activity on qualifying loans until the new laws became effective. “I would hope that no one would be foreclosed upon between now and October 1st who would have qualified for this program had the effective date been immediate,” Frank said in remarks during a committee hearing. “I think it would be a shame, an embarrassment to all of us if people were to lose their homes and the neighborhood deterioration were to be advanced and the economy would suffer because to satisfy CBO and other rules, we delayed this a couple of months.” But the delay could be much more than just a few months, according to a report Friday evening in American Banker, which cited HUD officials as saying that the provisions of the new housing bill wouldn’t like be effective until the middle of next year. A HUD spokesperson told American Banker that it was “absolutely totally unlikely” that the new program would be ready by October 1, noting the process HUD must go through to implement new programs — including determining underwriting standards for the new loan program the housing bill would create. Without those standards, which could take through the end of this year to finalize, servicers will have nothing to go on in terms of refinancing troubled borrowers under the new program. Which means two things: servicers choosing to hold off on even some foreclosures now in the hopes that they’ll be able to write-down, write-off and refinance certain troubled loans face the uncertainty of not knowing which loans will actually qualify, as well as the unsavory likelihood that they’ll be self-imposing a moratorium that could last much longer than 60+ days. It also means that Barney Frank is one ticked-off Congressman. “The notion that this takes a normal bureaucratic response when you have this social and economic crisis is unacceptable. … that would be incompetence bordering on malfeasance,” he said in an interview with American Banker on Friday. “I cannot believe that this would wait.” HW’s key sources have suggested that servicer advances are likely the most critical piece of the puzzle going forward, and that the housing bill — if anything — further puts pressure in this area. “Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,” said one industry consultant who asked not to be named. “And worse yet, nobody knows just how long servicers would need to keep advancing their money to a trust, since apparently there is a good chance the program wouldn’t be in place by October.” A few servicing managers HW has spoken with have suggested that the only way many servicers can survive the current environment is by having access to the discount window or FHLB advances, to help keep servicing operations afloat — meaning that the servicing shop has to be within a bank, generally speaking. And that’s exactly the sort of capital strain, BTW, that many of the nation’s already-limping banks can ill afford to take on right about now.