How the New Housing Law Helps Consumers
Now that Uncle Sam has finally devised a bandage for the bleeding housing market, aptly named the Housing and Economic Recovery Act of 2008, it will be awhile before we start seeing just how much of an impact it will have on consumers and the U.S. economy. While no one expects a cure-all of current woes, the measure will provide some badly needed comfort. Conservative critics are already poo-pooing it for its intrusive, Big Government approach, while others say its safety net doesn't stretch far enough to snag the vast number of pending home defaults.
The act aims to help some 400,000 cash-strapped homeowners avert foreclosure. They will be allowed to replace their existing mortgages with a 30-year fixed-rate loan insured by the Federal Housing Administration (FHA) for as much as 90 percent of their home's current value. (Banks and lenders will have to write off a portion of the exsiting loan — which means they swallow the losses — and it's up to them to decide if they want to participate in this assistance program.)
The FHA, which was created as part of the New Deal way back in the depressed 1930s, will again be assuming more of a 'depression era' role by insuring up to $300 billion of these loans over a three-year period. These benefits don't kick in until Oct. 1 (and will last through Sept. 30, 2011), so people currently teetering on the brink of foreclosure may not be able to wait until the fall to save their homes.
For consumers, the new housing law also offers:
- A $7,500 tax credit or 10 percent of a home's purchase price (whichever amount is smaller) to first-time buyers. But you have to pay back the 'credit' over the next 15 years or when the home is sold. This benefit is retroactive to homes bought since April 9 of this year and expires July 1, 2009.
- A maximum FHA-insured loan amount of $625,000 (depending on the area). Also, FHA loans will now require a 3.5 percent down payment, rather than the current 3 percent.
- More time for returning soldiers to fight off the foreclosure enemy. Lenders must wait nine months before starting foreclosure proceedings, instead of the current three months.
- More consumer protection by requiring lenders to disclose the maximum monthly payments that are possible under their loan. The law also requires that disclosures be provided no later than seven days prior to closing, so borrowers can shop for another loan if they're not satisfied by the terms.
- $3.92 million to communities across the country hardest hit by the foreclosure crisis. This modest sum, compliments of the U.S. Department of Housing and Urban Development, hopes to stabilize neighborhoods and towns that are seeing deteriorating home values, increased crime and faltering economies due to foreclosed properties. This money will take the form of supplemental Community Development Block Grant Funds that will be used to purchase foreclosed homes at a discount and rehab them.
- An additional $150 million for pre-foreclosure counseling to help struggling families keep their homes. An extra $30 million will provide legal services to distressed homeowners.
Although this program is a modest step forward — yes, our government, intrusive or not, did need to legislate some sort of financial relief from the pain caused largely by greedy free-market practitioners — it's unlikely to save the day. 'It's not enough, even in the best of circumstances,' warns Mark Zandi, chief economist of Moody's Economy.com, as quoted in The New York Times. The number of people who will be helped 'is going to be overwhelmed by the three million [homeowners who] are headed toward default.'
Yikes! Not a good prognosis, one that is aggravated by continually falling home prices, rising consumer prices and an unemployment rate that's been ballooning during the last seven months.
The cold reality is, there's no silver bullet for quickly ending the housing crisis — and there won't be. Just like a nasty hangover the morning after a wild party, we will have to patiently ride out this mess, and at best, glean from it the valuable financial and ethical lessons it's currently teaching us.
Read a summary of the entire housing law.
Got hot local housing tips or a story you want to share? Contact Dean Golemis at openingdoorsblog@HomeFinder.com.
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