Tuesday, October 21, 2008

Housing and Economic Recovery Act of 2008 FAQ

Q: How will the law help struggling homeowners keep their homes?

A: Through the Federal Housing Administration (FHA), an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages. The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90% of the property's current value.


Q: When will the program begin?

A: The program will begin on October 1, 2008 and sunset on September 30, 2011. Homeowners in danger of losing their homes before October 1, however, should not wait to contact their loan servicers and should begin applying for federally insured mortgages now.


Q: Who is eligible?

A: To be eligible to participate in this program, a borrower must:
Have a loan on an owner-occupied principal residence. Investors, speculators, or borrowers who own second homes cannot participate in this program.
Have a monthly mortgage payment greater than at least 31 percent of the borrower's total monthly income, as of March 1, 2008.
Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently.
Not have been convicted of fraud.


Q: How can a homeowner access this new program?

A: Homeowners or a servicer of an existing eligible loan need to contact an FHA-approved lender. The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program. If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage. Loans provided under this program must be 30-year fixed rate loans.


Q: Are lenders required to participate in this program?

A: No. The program is completely voluntary for lenders, investors, loan servicers, and borrowers.


Q: How does this law help neighborhoods that have been hit by the foreclosure crisis?

A: The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities, and governments across the nation. The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market.


Q: Will this law be a bailout for speculators, homeowners, investors, and lenders?

A: No. It is narrowly tailored to keep families in their homes. For example:
Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
Investors and lenders must take big losses first in order even to participate. The owner of the old mortgage can get a maximum of 90% of the current value of the home (which presumably will be considerably less than the value of the original loan). In many cases the loss will be significantly greater, but 10% is the minimum.
In addition, lenders must waive any penalties or fees, and help pay for the origination and closing costs of the new loans.
Most homeowners will have seen the equity in their homes disappear before being able to refinance under this program. In addition, the FHA will get a portion of any future profits on the house, to make sure the government recoups its investment over the long run.


Q: Will this law reward families who bought homes they could not afford?

A: Many homeowners facing foreclosure were misled, were deceived, or were in other ways the victims of unfair lending practices.To prevent future abuses by lenders, this law will establish a nationwide loan originator licensing and registration system to set minimum standards for all residential mortgage brokers and lenders. It also strengthens mortgage disclosure requirements to help ensure that borrowers understand their mortgage loan terms.

Q: How will this law make it more affordable to own a home?

A: There are a number of provisions that will make homeownership more affordable:
Creates a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years).
Grants states $11 billion of additional tax-exempt bond authority in 2008 that they can use to refinance subprime loans, make loans to first-time homebuyers and to finance the building of affordable rental housing.
Raises conforming loan limits for the FHA, Fannie Mae and Freddie Mac to $625,500. Because of the high cost of housing in California, a majority of the state's residents were previously shut out from these programs. Raising these loan limits will lead to lower interest rates on some loans, greater refinancing opportunities, and enable more borrowers in high cost areas to avoid the type of nontraditional and frequently abusive loans that led to the current crisis.
Provides couples using the standard deduction with up to an additional $1,000 deduction for property taxes ($500 for individuals).


Q: Does the law provide help to those who still cannot afford to own a home?

A: Yes. The bill includes a number of provisions to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis. For example:
The bill creates a new permanent affordable housing trust fund – financed by Fannie Mae and Freddie Mac and not by taxpayers – to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.
In addition, the legislation provides a temporary increase in the Low-Income Housing Tax Credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.

Friday, October 17, 2008

Redlining was the by far the most significant mechanism used to create and sustain segregation. According to Denton and Massey:

HOLC

...beginning in the 1930s, the federal government launched a series of programs designed to increase employment in the construction industry and make homeownership widely available to the American public. The Home Owners' Loan Corporation (HOLC) was the first of these programs, and it served as a model for later efforts.... Unfortunately for blacks, the HOLC also initiated and institutionalized the practice of "redlining." This discriminatory practice grew out of a rating system HOLC developed to evaluate the risks associated with loans made to specific urban neighborhoods. Four categories of neighborhoods were established, and lowest was coded with the color red; it and the next-lowest category virtually never received HOLC loans. Black areas were invariably rated as fourth grade and redlined. [These practices] lent the power, prestige, and support of the federal government to the systematic practice of racial discrimination.
In the 1930s and 1940s banks used the HOLC maps to make their own loan decisions. Thus HOLC not only channeled federal funds away from black neighborhoods but was also responsible for a much larger and more significant disinvestment in black areas by private institutions.
By far the greatest effect of the HOLC rating system, however, came from its influence on the underwriting practices of the Federal Housing Administration (FHA) and the Veterans Administration (VA) during the 1940s and 1950s. These loan programs together completely reshaped the residential housing market of the United States and pumped millions of dollars into the housing industry during the postwar era. Loans made by the FHA and the VA were a major impetus behind the rapid suburbanization of the United States after 1945... the marriage of FHA financing and new construction techniques made it cheaper to buy new suburban homes than to rent comparable older dwellings in the central city.
As a result, the FHA and VA contributed significantly to the decline of the inner city by encouraging the selective our-migration of middle-class whites to the suburbs. "In evaluating neighborhoods, the agency [FHA] followed the HOLC's earlier lead in racial matters; it too manifested an obsessive concern with the presence of what the 1939 FHA Underwriting Manual called “inharmonious racial or nationality groups." According to the manual, "if a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes."
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"It is my belief that black citizens of this era were stuck between Jim Crow(Genocide) and the HOLC, which funneled wealth away from many minority communities in the form of home ownership."

-Eugene O. Smith, Jr.

Wednesday, October 15, 2008

Understand the Financial Crisis

Freddie and Fannie, Bernanke, Bush, mortgages, loans, foreclosure, $700 billion bailout, recession, crisis. These are the words filling the headlines and being tossed around in Washington and on Wall Street in worry and, yes, panic. What does it all mean?

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The End of Credit Card Consumerism May Be Near

For more than four decades, the shopaholic America has shown an insatiable desire to spend until our credit cards melt. Yet today, a sharp slowdown, record-high gas prices, high consumer debt levels, a plunging real estate market, and the growing green movement all seem to be conspiring to dethrone the credit card way of life.

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