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The Housing and Economic Recovery Act of 2008

Signed into law in July, 2008, this huge bill covers a large variety of subjects related to the housing market. Probably most important, it puts the federal treasury squarely behind the government-chartered companies Freddie Mac and Fannie Mae. Because these companies buy and guarantee so many home mortgages, it’s important to future homebuyers that they remain flush.

To provide relief for people facing foreclosure, the bill established a Hope for Homeowners Program, effective October 1, 2008. This program authorizes the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced loans, issued to homeowners to convert their variable- and teaser-rate mortgages into lower-interest, fixed-rate 30-year mortgages. According to government estimates (nobody really knows for sure), between 300,000 and 400,000 homeowners will benefit from this program.

Whether or not you will be able to refinance your loan under this program will depend on your lender—for whom the program is completely voluntary. And there’s the rub. In order for you to get refinancing under this program, your lender must agree to cash out the existing loan at 90% of the home’s current appraised value. For example if your loan is for $300,000 and an appraisal puts the home’s value at $200,000, your lender must agree to cash out the loan for $180,000 (90% of the value).

Why would a lender voluntarily reduce the size of the loan? The idea is that the lender will be better off cashing out your loan at 90% of its appraised value rather than having to go through the foreclosure process, which may in the end generate even a larger loss.

Holders of second and third mortgages will most likely get little or nothing when the refinancing takes place, although new standards will be developed by the FHA supervisory board to accommodate these junior lienholders. But if later, the home goes up in value and is sold for a profit, second and third mortgage-holders may be entitled to a portion of the proceeds.

There are other requirements as well for taking advantage of this program. Most likely, you will qualify only if you are in default on your mortgage and you certify under oath that the default was not deliberate. You must have a high income-to-mortgage debt ratio (which means your current mortgages are barely affordable), and you must be able to demonstrate that you can afford the new mortgage (under affordability standards currently in use by the mortgage industry; see Ch. 3).

You’ll also have to prove your income by, at a minimum, submitting income tax returns for the previous two years. The specifics of these requirements will be developed by a newly created board overseeing the FHA, Freddie Mac, and Fannie Mae—and presumably will be in place by the time the program goes into effect.

For more information about this new program, see “Understanding the Housing and Economic Recovery Act of 2008” in the foreclosure area of www.nolo.com. Also, you should contact a nonprofit housing counselor if you want to apply for refinancing under this program. See Ch. 4 for more on nonprofit housing counselors.