With the US economy performing poorly, to the say the least, and the housing industry one of the main culprits behind its downturn, Americans have been looking everywhere for answers to their day-to-day woes, among them rising gas and food prices, and even foreclosure. However, many big-picture issues are only possible to handle on a wide scale, beyond the reach of many Americans just concerned with getting to work and putting food on the table.
While the health of the economy is a delicate balance of countless factors, Congress has been targeting specific issues that it believes will relieve both macroeconomic troubles as well as financial issues affecting the daily lives of many Americans. The new housing bill passed by both houses of Congress and signed by President Bush takes such a two-pronged approach to address both types of economic issues that the US is facing.
On a large scale, the bill provides a pledge to back Fannie Mae and Freddie Mac, two of the nation's largest mortgage security institutions, who together own or back nearly half of the entire $12 trillion US mortgage industry. Over the course of the last two business quarters, the two mortgage giants have written down enormous losses and seen their share value plunge to almost half of last year's value. At Total Bankruptcy, we profiled the Fannie Mae and Freddie Mac financial troubles and discussed possible scenarios and how it will affect the average taxpayer.
Basically, the pledge in the housing bill works like a permission slip for the federal government to spend large quantities of money in the event that Fannie Mae and Freddie Mac are about to go under. The government would invest in large quantities of stock and provide potentially billions in bailout money to cover all the assets the two own that are currently worthless because they cover foreclosed homes and mortgages more expensive than the property to which they're secured.
The second piece of the housing bill grants relief to individual homeowners who find themselves owning one of the worthless mortgages. Many individuals who received adjustable-rate mortgages or mortgages with no down payment have found themselves paying more than they can afford on property that has been steadily losing value after the housing bubble burst. Many people affected by the ARMs decided to file bankruptcy.
The shady tactics of predatory mortgage lenders are at least partially responsible for saddling homeowners with mortgages they can't afford, and the bill would allow those who acted in good faith to transfer their mortgage from the current, bad mortgage loan to a more stable, government-insured home loan. The bill establishes a voluntary program where lenders who agree to take a loss on a loan can refinance the loan through the government program. The tradeoff for agreeing to take a loss is the security provided by the government-insured loan; the lenders will take a loss either way, and could recoup some losses if the government insures the new mortgage contract.
The renegotiations aren't free, as one might expect. The borrower will have to contribute to insurance premiums of 1.5 percent per year to reimburse taxpayer money, and original lenders will have to pay upfront into the insurance fund.
In any case, as many as 400,000 homeowners could be eligible to receive debt relief with the new bill. The long-term effects of the bill are unknowable, but right now, it seems that it's the best Congress can do in the face of the current economic catastrophe.