Under pressure from consumer groups and troubled homeowners to prevent further collapse in the housing market, Senate Democrats and Republicans are working together to create a foreclosure relief bill.
Approximately $1.5 million worth of subprime mortgages will reset to higher rates before then end of 2008. And subprime is just the tip of the iceberg. Before the credit bubble has deflated completely, an estimated $1 trillion in defaults and writedowns are expected as bonds, commercial mortgages, leverage loans and other mortgage loans go sour.
Lawmakers are under extreme pressure from some groups to do something to bail out Main Street. Since the bailout of Wall Street firm, Bear Stearns, the pressure has increased considerably.
Although the Democrats have been pushing for broader government intervention for some time now, the Republicans have held firm on their belief that such action might cause more problems than it fixes.Â Â
This week a notable change occurred. The Senate agreed to set partisan differences aside to create legislation that is meant to prevent foreclosures and bolster the ailing housing market. The new consensus is that immediate action must be taken.
On Tuesday, the Senate voted overwhelmingly to move forward with new housing legislation. Late Wednesday, they unveiled the Foreclosure Prevention Act.
Democrats and Republicans have reached a tentative agreement on the core details and will be debating amendments in the coming days. The core of the plan provides:
- A $4 billion fund for local governments to clean up neighborhoods riddled with foreclosed homes.
- $100 billion for mortgage counseling programs.
- $10 billion for federal tax-exempt bonds to help finance and refinance home purchases.
- A $7,000 tax credit to people who purchase newly built homes, foreclosure properties or properties owned by sellers in default.
- A new loan limit for the Federal Housing Administration that will allow borrowers to finance 110 percent of an area’s median home price versus 95 percent.
The Foreclosure Prevention Act also includes special provisions for soldiers. If the bill is signed into law, lenders will not be able to foreclose on a soldier’s home for at least nine months after the soldier returns from active duty. Lenders will also be forced to put a one year rate freeze on mortgages that are held by active-duty soldiers who face a rate reset.
Amendments that are up for debate include a plan that will give bankruptcy judges the power to write down mortgage principal and a plan that will offer tax breaks to homebuilders who have experienced credit losses over the last two years.
If the legislation is approved, it will go before the House of Representatives and eventually President Bush. There is already some doubt as to whether or not it will make it all the way. A White House spokesperson released a statement Wednesday afternoon saying there were “serious concerns about some of the elements.”