On May 8th, the U.S. House of Representatives passed a mortgage rescue plan that, although threatened by a veto from President Bush, could help homeowners facing foreclosure stay in their homes with lower-cost loans.
Congresswoman Melissa Bean, who represents Illinois’ 8th District (Chicago’s north and northwest suburbs), authored three parts of the package that were expressly designed to keep the bill from rewarding irresponsible borrowers with government funds. “There’s an implication from opponents that this is somehow gifting taxpayer money to borrowers,” says Bean. “But that’s not at all part of this legislation. What we’re doing is, if lenders were seeing foreclosing as the most likely option, this gives them an option to keep those borrowers in the home and make them eligible for a [government-backed] loan at a lower payment that they can afford.”
Lenders prefer not to foreclose because they face steep carrying costs and, typically, large losses on the ultimate sale of the property. The House’s mortgage-aid package, spearheaded by Representative Barney Frank of Massachusetts, instead lets lenders offer struggling homeowners a lower-cost loan, backed by the Federal Housing Administration (FHA). To do a “loan workout” under this program, the lender voluntarily gives up a portion of its equity in the property—but less, the plan’s proponents argue, than the lender would lose through foreclosure.
In addition to requiring participating homeowners to pay an annual 3 percent fee to the government on the outstanding balance of the loan, the program also obliges them to hand over a share of any profit on the eventual sale of the house. In the first year of the loan, the government would receive 100 percent of any profits; over the next three years, its share would drop to 50 percent. Here, Bean’s work was important: In an earlier version of the bill, the government’s would have received a smaller share of the profits, and it would have received nothing once the loan passed the five-year mark. Bean pushed to hold the line at 50 percent and to maintain that level until the eventual resale of the house. (This requirement applies even after the workout loan is paid off; it’s essentially a government lien against the house, to be repaid no matter when the home is sold.)
As Bean sees it: “This says to those people who kept making their high payments and don’t feel the taxpayers should be bailing out their neighbors who didn’t: ‘Hey, you don’t want this deal. You don’t want to give up 50 percent of your equity.’ It’s only going to [appeal] to people who are facing foreclosure and don’t have any other choice.”
The FHA will not make the new loans, but it will back them up. Only if borrowers fail to make good on their new loans will taxpayer funds be expended. The Congressional Budget Office has estimated that the cost to taxpayers could total about $2 billion. But Bean forecasts that it will be “much less than that,” because she believes that the package will go a long way toward stabilizing the larger housing market as well as the individual borrowers’ financial situations. Bean and other proponents of the plan hope that will help ensure there is no second wave of foreclosures.
Bean pushed for two other provisions that she believes will protect taxpayers. One of them blocks access to the program by anyone convicted of mortgage fraud or who misstated his income on loan documents; her other provision blocks borrowers from using the program to finance loans on second homes. The program applies only to primary residences, limiting mortgage aid to people who are in clear danger of losing the place where they live—not the place where they vacation. In the part of the legislation that stipulates how much equity the government gets via these new loans, there is also a section prohibiting borrowers from using any equity gained through the reworked mortgage to take out a second mortgage or a home equity line of credit for the first five years.
Since even before the House passed its mortgage-aid plan, there has been strong speculation in Washington, D.C., and in the media that President Bush will veto the program. Bean says that she’s hopeful the plan will survive. “We’ve gotten mixed messages from the administration about a veto,” she says.
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