The Federal Government swooped in last weekend to seize the beleaguered mortgage giants Fannie Mae and Freddie Mac, empowered by a law Congress passed in July. One immediate result: mortgage rates dropped by half a percentage point in just a few days. But other provisions of the nearly 700-page law that goes into effect Oct. 1 are likely to be even more important to homeowners, potential homeowners and potential former homeowners those whose mortgages now exceed their current means. That's when the government will begin releasing billions of dollars for a range of programs meant to assist people with mortgages they can't afford, help communities reverse the negative effects of foreclosure, and encourage house hunters to jump in and get some of that excess inventory off the market.
Officials at HUD, Treasury, the FDIC and the Federal Reserve are working feverishly to sort out the fine print of a program that will let the Federal Housing Administration (FHA) insure up to $300 billion of new, fixed-rate mortgages for homeowners who owe more than their house is worth and can't afford their current loan. There's a lot to sort out, considering that a key part of the program is convincing lenders to take a haircut to accept less than what they're owed. The inducement is that the FHA is on the hook if a homeowner defaults on the refinanced mortgage. In return for taking that risk, the FHA, as guarantor, will share in any profits the homeowner collects from a sale. The FHA will pass some of those profits along to any other lenders who have a claim on the house like a second mortgage or home-equity line of credit to get them to agree to the deal. In July, when the bill passed, the Congressional Budget Office estimated that the FHA could realistically wind up insuring about $68 billion worth of loans, thereby keeping some 325,000 families in their homes.
Will lenders play ball? That's a big question, especially since final regulations won't be published until Oct. 1. Reducing the principal amount of a loan is pretty much the last thing lenders want to do, but as property values continue to fall and the number of bank-owned houses grows, they might become more open to negotiation.
States and cities are eagerly awaiting word about their slice of the $3.9 billion designated for communities to buy and rehab (or knock down) foreclosed homes. HUD is hard at work on the formula that will dictate where the money goes, with the broad goal of funneling the money to the places where foreclosures are having the most deleterious effects. Some local governments haven't waited for federal money. Boston, for example, bought its first four foreclosed properties in May for 20 cents on the dollar. Evelyn Friedman, director of the city's Department of Neighborhood Development, says that if Beantown got $2 million in federal funds (she's just picking a number and hoping for more), the city could probably snap up at least 100 more houses, or about a tenth of all bank-owned properties in Boston. "We're very focused on what we're going to do with that money," she says. "We're talking about some streets where every other property is foreclosed." Plenty of local officials are wary of navigating the maze of lenders and servicers that is partly keeping private players away, and of the short time frame for using the funds (18 months), but they're nonetheless getting ready, studying their foreclosure heat maps to determine which neighborhoods make the best candidates for reinvestment.