Bush green-lights housing bill
President drops veto threat of bill to offer $300 billion in mortgages and back up Fannie Mae and Freddie Mac. House vote expected Wednesday.
NEW YORK (CNNMoney.com) -- President Bush dropped his threat Wednesday to veto a sweeping housing bill that will offer up to $300 billion in assistance to troubled homeowners and throw government support behind mortgage finance giants Fannie Mae and Freddie Mac.
The House is expected to pass the nearly 700-page measure on Wednesday afternoon. It could then go back to the Senate for a final vote as early as this evening.
"The positive aspects of the bill are needed now to increase confidence and stability in the housing and financial markets," White House spokeswoman Dana Perino said Wednesday.
The legislation, which won the support on Tuesday night from key senators in both parties, is the centerpiece of Washington's efforts to address the nation's housing meltdown.
Home prices have fallen more than 15% nationwide over the past year, according to S&P/Case-Shiller Home Price Index. More than 340,000 have had their homes repossessed by banks during the first six months of the year, up 136% from the same period in 2007. The number of homeowners who have become delinquent in their mortgage payments during the same period has risen to 1.4 million, up 56% from a year ago.
Authorizing help for Fannie, Freddie
To help stabilize markets, which were shaken in the past few weeks by steep declines in the stock prices of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), Treasury Secretary Henry Paulson asked Congress to give the Treasury broad, but temporary powers intended to provide a liquidity and capital "backstop" for the two companies.
Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.
The bill allows Treasury over the next 18 months to offer Fannie and Freddie an unlimited line of credit and the authority to buy stock in the companies if necessary.
Fannie stock was up 22% and Freddie stock was up 13% in early trade.
Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.
In a speech in New York on Tuesday, Paulson stressed again there are no immediate plans to exercise the powers he seeks and characterized the proposal as a way to support Fannie and Freddie and bolster the capital markets and economy.
"The best way to protect the taxpayer is to have very flexible powers which are temporary," Paulson said.
The Congressional Budget Office on Tuesday estimated the potential cost of a rescue could be $25 billion. CBO said it thinks there is probably a better than 50% chance that the Treasury would not need to step in. It also said there is a 5% chance that Freddie and Fannie's losses would cost the government $100 billion.
Helping at-risk borrowers
The bill also aims to help homeowners at risk of foreclosure and to bolster regulation of Fannie and Freddie. Among other things, it would:
Increase the Federal Housing Administration's role. The FHA could insure up to $300 billion in new 30-year fixed rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down their loan balances to 90% of the current appraised value of their homes.
Lenders would also agree to pay upfront fees to the FHA equal to 3% of a home's appraised value. Borrowers must agree to pay an annual premium to the FHA equal to 1.5% of their new loan balance and they must also agree to share with the government any profit they realize from selling or refinancing their home.
The cost of the new FHA program - which would begin on Oct. 1 and be in place for just a few years - would be funded by fees from Fannie and Freddie.
Create a stronger regulator for the GSEs: The new regulator will have a greater say over how well funded the agencies are - a major concern in the markets that has sent stocks in both companies plunging.
Permanently increase "conforming loan" limits: The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,000 from $417,000.
The FHA maximum loan limits for high-cost areas would also increase to $625,000.
Higher loan limits will make it easier for borrowers to get mortgages, because they're more likely to be traded if they are considered conforming.
Create home buyer credit: The bill includes a tax refund for first-time home buyers worth up to 10% of a home's purchase price but no more than $7,500.
The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments by the buyer.
The refund would be reduced gradually for single filers with adjusted gross incomes above $75,000; and for joint filers with AGIs over $150,000.
Bars down-payment assistance for FHA loans: The bill eliminates a program that has allowed sellers to provide down payment assistance. The seller-funded program is largely the reason why the agency's reserve has fallen by $4.6 billion, according to FHA Commissioner Brian Montgomery. Currently, that reserve is roughly $16.4 billion.
The bill would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.