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Will “the most important piece of housing legislation in a generation” help you? President Bush withdrew his veto threat and signed the bipartisan bill that was praised by many and had its historical importance defined in the quote from Senate Banking Committee Chairman, Chris Dodd.
It authorizes $300 billion to assist homeowners and support Fannie Mae and Freddie Mac. Most mortgages must conform to standards set by FNMA, which bundles together loans that conform to their guidelines and sells them to investors as mortgage-backed security bonds. FNMA charges a fee to investors in return for a guarantee that the principal and interest on underlying loans will be paid even if borrowers default. The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, buys loans on the secondary market, bundles and sells them. However, they do not set lending standards as Fannie Mae does. Both of these stockholder-owned companies are government-sponsored enterprises (GSEs), which have been in a unique status because the securities sold by these privately held companies are not guaranteed by the U.S. Treasury.
One of the objections to the new mortgage bail-out legislation: It authorizes Treasury to provide Fannie Mae and Freddie Mac with an unlimited line of credit and to buy stock in the companies to prevent them from failing.
About the Consumer
The new law becomes effective on October 1. At that time, thousands of borrowers with re-set mortgage interest rates, which are unaffordable, will be eligible to re-finance into new low-cost, fixed-rate loans insured by the FHA (Federal Housing Authority).
Conforming loan (those with the best 30-year fixed interest rates) limits will increase from $417,000 now to $625,000. And in high home cost areas the FHA maximum loan limits will also increase to $625,000. But the FHA changes come with a mountain of red tape, including somewhat complex formulas requiring consumers to share future profits with the FHA, which is likely to cause discouragement to many borrowers who need the loans.
In addition, to be eligible borrowers must live in the home they are refinancing and the original loan must have been written between January 2005 and June of 2007. This narrow time span will be troubling to the thousands of borrowers who qualified for 5-year adjustable rate mortgages (ARMs) in 2003 and 2004. Those ARMs have recently begun to reset and these borrowers will not be helped by this legislation although they tended to have stronger credit histories when they qualified for their original loans. It is anticipated that many of the early 5-year ARM borrowers cannot afford current loan rates, which will lead to a new wave of foreclosures.
One more important note: To be eligible for this new program, at least 31 per cent of gross monthly income must be currently spent on mortgage debt.
The loans will be available to those in default as well as those whose payments have remained current, as long as they can prove they will not be able to continue to make payments on an existing mortgage.
If you have a mortgage issued between January of 2005 and June of 2007 and you know you will not be able to keep up the re-set payments, which will exceed 31 per cent of your gross monthly income, these new FHA sponsored loans may be the perfect solution for you.