Housing and Economic Recovery Act of 2008

From the State Bar of California, Insolvency Law Committee

August 15, 2008

Dear Insolvency Law Committee Constituency List Members:

President Bush signed legislation on July 30, 2008, entitled the Housing and Economic Recovery Act of 2008 ("HERA"), regarding a wide range of housing and mortgage issues.  Those matters most pertinent to the Insolvency Law Committee are summarized below. 

FHA Program to Refinance Distressed Mortgages and Other Foreclosure Protection

HERA establishes a program for the Federal Housing Administration ("FHA") to insure up to $300 billion in refinanced mortgages, designed to allow borrowers in danger of losing their home to obtain less-expensive, fixed-rate loans through the FHA beginning in October 2008.  Only primary residences are eligible.  In exchange for an FHA guarantee, borrowers must share any appreciation with the government from the subsequent resale of a refinanced home.  In order to participate, lenders must agree to accept significant loss by reducing the principal amount of the loan by up to 15 percent.  Many lenders are likely to accept such terms, if their only alternative is foreclosure, in which they stand to lose the difference between the principal amount of the loan and the property's value.  In addition, HERA extends the period that a lender must wait before starting foreclosure of property owned by a person in military service from three months to one year after the soldier returns from service. 

New Caps on Government Sponsored Mortgages and Related Regulation

As of January 1, 2009, HERA will raise the limit on loans that Fannie Mae or Freddie Mac can buy or insure in high-cost areas to $625,000 from $417,000.  This presumably will lower interest rates for new homes and refinancings in those areas, as interest rates on so-called jumbo or non-conforming loans are typically higher than the rates on conforming loans which are eligible for Fannie Mae or Freddie Mac purchase or insurance.  Earlier this year, Congress had temporarily raised the caps for such loans, for 2008 only, to $729,750 in high-cost regions.  HERA also creates a regulatory agency to oversee Fannie Mae and Freddie Mac, which own or guarantee almost half of the mortgages outstanding in the United States.  In addition, the legislation will provide the Treasury Department an unlimited line of credit to Fannie Mae and Freddie Mac, and, if necessary, allow it to buy stock in those entities.  This enhanced support for the government sponsored is expected to bolster investor confidence, thereby increasing liquidity for borrowers.  However, this backing by the federal government puts taxpayers at risk. 

Housing Tax Breaks

HERA includes $15 billion in tax benefits, including (i) beginning in 2008, a deduction of $500 to $1,000 (for joint filers) for real property taxes incurred by taxpayers that do not itemize, and (ii) a tax credit of up to $7,500 for first-time homebuyers with modified adjusted gross income of $75,000 ($150,000 for joint filers) or less, who purchase a principal residence between April 9, 2008 and July 1, 2009.  The tax breaks are refundable, and must be repaid over 15 years, essentially making them interest-free loans.  They are expected to provide some stimulus to the home buying market. 

In addition, the legislation provides an additional $10 billion in mortgage revenue bonds for states' residential rental projects.  HERA also earmarks $4 billion in grants for local governments to buy and rehabilitate foreclosed or abandoned properties in communities that have been particularly impacted by increased foreclosures.  This is intended to provide funds for such areas to revitalize blighted neighborhoods and create affordable housing. 

These materials were written by Gary Kaplan of Howard Rice Nemerovski Canady Falk & Rabkin, P.C. in San Francisco.  gmkaplan@howardrice.com