Quotes of the Day

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.

States are also waiting to hear details about the $11 billion in tax-exempt bonds they'll collectively be allowed to issue to help refinance subprime loans, provide low-interest mortgages to first-time home buyers and finance the construction of low-income rental housing. The Michigan State Housing Development Authority (MSHDA), for example, already has two programs to help homeowners refinance into lower-rate loans, using funds from tax-exempt-bond issues. "This is more of a preventive tool," says Mary Townley, director of MSHDA's homeownership division. "We're trying to have an option for homeowners before they're four or five months delinquent." Word on how much each state will be allowed to issue comes on Oct. 1.

Housing-counseling organizations are busy writing grant applications to claim a slice of the $180 million the federal housing bill slots for pre-foreclosure counseling. NeighborWorks, the nonprofit network of community groups that's responsible for handing out the money, estimates some 350,000 homeowners might be reached through counseling sessions, foreclosure-prevention fairs and campaigns to raise awareness about what options are available. The money, which comes in addition to $180 million of emergency funding Congress allocated last year and which should hit communities by December, should also help counseling agencies add much needed manpower. "They're triaging folks as they walk in the door — they want to spend time with folks who have a foreclosure auction in a few weeks before folks who aren't even delinquent," says NeighborWorks CEO Ken Wade. "Our intention all along has been to reach consumers earlier in the process, to get ahead of the problem."

Further down the road, there's one more provision that will directly affect homeowners: tax breaks. As of tax year 2008 (what you file shortly before April 15, 2009), homeowners who don't itemize but who do pay property taxes can add up to $500 to the standard deduction ($1,000 for joint filers). And first-time homebuyers who earn less than $75,000 a year ($150,000 filing jointly), can take a tax credit worth 10% of the value of their new home, up to $7,500. One catch: Starting two years after you buy the house, you'll have to start paying that money back (really, it's an interest-free loan). But by that time we hope we will be well into the next housing-market upswing, and people will be doing all these things — buying homes, making loans, building houses— without billions of dollars' worth of government prompting.

• Barbara Kiviat
• Following the government takeover, a range of new programs are on the way for homeowners who can't afford their mortgages