The Federal Housing Finance Regulatory Reform Act of 2008 (HR 3221). 


On July 30, 2008, President Bush signed the Federal Housing Finance Regulatory Reform Act of 2008 (HR 3221).  The bill, which is the largest housing bill in a generation, passed the House and Senate earlier in the month.  This is an enormous piece of legislation that includes a number of asset building recommendations to assist lower income workers and people with disabilities in these challenging economic times.

WID’s policy partners, CFED, provided both leadership and direction through the lengthy legislative process and were quite successful in including recommendations for inclusive asset building programs.  According to CFED, the act provides greater resources for community development and affordable housing including foreclosure prevention, housing counseling, homeownership, and manufactured housing.

The new law authorizes a $300 billion expansion of Federal Housing Administration loan guarantee programs to assist distressed borrowers. Congressional Budget Office estimates state that this program is expected to assist 400,000 families in avoiding foreclosure by providing 30-year fixed mortgages to troubled borrowers. These new mortgages are targeted toward borrowers who currently have mortgage-to-debt ratios in excess of 30%.  The program is designed to allow mortgage holders the option to offer borrowers a loan with reduced principal. Lenders would effectively write down existing mortgages to 85% of their current appraised value, and borrowers would have to share gains with the FHA if they later sold at a profit.  Of course, the fear is that the mortgage holders will “cherry pick” loans at the 30% threshold, while ignoring borrowers in deeper financial trouble with 40% and 50% ratios.

The bill also provides up to $180 million for financial and legal counseling to assist borrowers.  This assistance would take the form of foreclosure avoidance counseling to intervene in the process prior to individuals losing their homes.

The new law will provide $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.  These dollars are targeted to assist areas hardest hit by the real estate down turn.  It is hoped that this funding can assist local non-profit housing agencies in the acquisition of properties to further build the community’s stock of affordable housing units.

Of particular interest to housing and disability advocates is the creation of the National Housing Trust Fund.  Funded by future profits from Fannie Mae and Freddie Mac, the fund represents a new permanent program with a dedicated source of funding not subject to the annual appropriations process.  Thus, the funding for the trust fund is mandatory, and will not compete for dollars with other HUD programs.

The amount will be based on a percentage of each company’s annual new business. According to the National Low-Income Housing Coalition (NLIHC), using the formula in the bill, the amount in 2007 would have been $557 million. Because their new business is increasing, the amount in 2008 is expected to be higher. However, 25% of the funds each year must first go to a reserve fund at the Treasury to offset scoring problems.  The coalition states that the remaining 75% of the funds will be divided between the Housing Trust Fund, which gets 65%, and a new Capital Magnet Fund that gets 35%. For the first three years, a percentage of the funds (100% in FY09, 50% in FY10, and 25% in FY11) will be diverted to a reserve fund to cover losses that the FHA might incur refinancing troubled mortgages through the new Hope for Homeowners Program. Based on the projected amount the formula will produce in calendar year 2008, approximately $300 million would have been available for the housing trust fund this year had it been in place with no diversions for the Hope for Homeowners reserve fund. Funds not needed to cover FHA losses eventually will revert to the Housing Trust Fund and the Capital Magnet Fund, according the NLIHC. 

Given the financial turmoil enveloping Fannie Mae and Freddie Mac, valid concerns have been raised about whether any funds will be available for new programs. For example, Freddie Mac announced second quarter, 2008, losses of $821 million compared with a profit of $729 million at the same time last year. In other words, funding a national housing trust fund from a percentage of profits sounds great, but it does pre-suppose there are profits from which to cull.  Additionally, both stocks have suffered a nearly 80% decline in 2008, triggering some speculation that both Freddie and Fannie could ultimately require additional federal support.  At the time of this writing, both institutions had enjoyed several days of positive news and share price inflation, reducing speculation of a continuing need for federal support of the share price to insure survival.

Recognizing the potential uncertainty of the market and the need for conservative fiscal flexibility, the new regulator has the authority to suspend contributions under certain circumstances related the fiscal distress of the government sponsored enterprises (GSEs). However, according to the bill, no money will be available for the Housing Trust Fund until FY10, by which time Freddie Mac’s and Fannie Mae’s fiscal conditions are optimistically expected to be much improved.

Affordable housing advocates applaud the provision of the trust fund which provides that at least 90% of the funds must be used for the “production, preservation, rehabilitation, or operation of rental housing.”  At least 75% of the funds for rental housing must benefit extremely low-income households (30% of area medium income or federal poverty level, which ever is higher) and all funds must benefit very-low-income households.

Unfortunately, even extremely low-income targeting of 30% is not low enough to assist people receiving Supplemental Security Income (SSI).  Individuals whose income is derived only from SSI typically require income targeting of 18% of area medium income to meet federal affordability standards, according to HUD.  Lower-income targeting, at 25% of area medium income, from a prior bill had to be abandoned as an ultimate compromise to passage. 

Despite the income targeting shortfalls, the trust fund does represent the first major federal housing production program since the Home program was created in 1990 and the first new production program specifically targeted to extremely low income households since the Section 8 program was created in 1974.

In addition, for the purposes of federal civil rights laws, the Housing Trust Fund is considered federal financial assistance. All activities carried out must comply with:

• federal laws on tenant protection and tenant participation,

• laws requiring public participation,

• fair housing and laws related to accessibility for people with disabilities (NLIHC)

The trust fund will be administered by HUD, which will provide grants to states, which will designate a state housing finance agency, housing and community development entity, a tribal designated housing entity, or any other qualified agency to receive the grants.

In addition to the 90% of funds earmarked for rental housing, the bill also provides that as much as 10% can be used for various first-time homeownership programs.  The specific language of the law considers anyone who has not had an ownership interest in a home for more than three years, to be a first-time homeowner.  Thus, individuals who may have lost a home to foreclosure or had to sell as a result of the real estate downturn could eventually qualify for these “first-time owner programs.”  These programs include funding for the production, preservation, and rehabilitation; down-payment assistance, closing cost assistance, and assistance for interest rate buy-downs.

According to the National Association of Realtors, the bill provides a one-time tax credit for first-time low- and moderate-income homebuyers.  This $7500 tax credit would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest-free loan).

The bill also provides a deduction for property taxes of up to $500 for single tax filers and $1,000 for joint filers who do not itemize.  This deduction is designed to assist older homeowners in capturing the property tax deduction despite no-longer having sufficient mortgage interest to justify itemizing on their return.   

Starting in October 2008, the new law also codifies an existing FHA proposal to prohibit the use of down payment assistance programs funded by those who have a financial interest in the sale; i.e. builders, developers.  However, the law does not prohibit other assistance programs provided by nonprofits funded by other sources such as churches, employers, or family members.

With the urging of CFED, the bill now includes manufactured housing as an underserved market for Fannie Mae and Freddie Mac, while new stringent criteria for reverse mortgage fees have also been set. 

Through the Federal Home Loan Bank (FHLBank), the bill also provides new funding for a “Capital Magnet Fund,” which in turn provides capital for Community Development Financial Institutions (CDFIs).  According to a CDFI Coalition press-release, the Capital Magnet Fund is “a landmark piece of legislation that creates a permanent trust fund for CDFIs.”  The bill states that the Capital Magnet Fund will receive annual allocations from Fannie Mae and Freddie Mac estimated to be between $175 and $350 million when fully funded in 2012.  Like the housing trust, during the first 3 years, portions of the Capital Magnet Fund will be set aside to help the mortgage crisis (100% in 2009, 50% in 2010, and 25% in 2011).  The fund will also require that CDFIs show they can leverage $10 of private funding for every $1 received from the Capital Magnet Fund.

CFED has identified two “next steps” for regulatory opportunities to improve the bill, hoping to address concerns when the new regulations are issued:

• Ensure greater resources are available to offset the proposed two-year re-allocation of Affordable Housing Program homeownership funds to refinance troubled mortgages.  CFED will urge the new regulator to ensure that any loans refinanced with AHP funds have borrower protections and require matching funds from the participating financial institution.

• The law states that either personal property or real property loans on manufactured homes may meet affordable housing goals for Fannie Mae and Freddie Mac.  CFED will argue that manufactured home loans titled as real property should receive preference as they provide more opportunities for asset appreciation for the borrower.  Any chattel loans that receive goal credit should have land tenure security.

 
In the end, with any new piece of legislation this large, the impact, positive or negative, will not be known for several years. However, many experts have suggested that the foreclosure and credit crisis may even get worse. For the sake of the entire economy and the financial future of millions of Americans, let us hope this new law has real teeth!