President Bush Introduces A Plan To Help Homeowners Through The Mortgage Crisis
President Bush proposed a new plan on August 31 that will offer some assistance to homeowners who are having problems making their mortgage payments. His plan recognizes that there is a national mortgage foreclosure crisis and aims to help some homeowners avoid foreclosure. It is at the very least, as acknowledgment that something must be done to help the millions of American homeowners who are and will face bankruptcy as a result of the subprime lending frenzy.
The proposed plan not a complete bail out for homeowners in distress, though it does attempt to offer some help to those in need.
Bush’s new plan involves the Federal Housing Administration (FHA), a government group which was developed in 1934 during the Depression. The FHA was created to give lower-income families an opportunity to own homes. The proposed plan gives the FHA more of a role in the mortgages market than it has had in several years. Due to the aggressive and highly competitive lending practices in the private sector by subprime lenders, the FHA has all but faded away in recent years.
If adopted, the President’s proposed plan will give some tax relief to some people by temporarily suspending the income tax that they face on the portions of their mortgage debts that are forgiven by lenders. Under current law, any amount of a mortgage debt that is forgiven by a lender must be reported as income on the borrower’s income tax return.
President Bush is also strongly urging mortgage lenders to voluntarily offer homeowners some relief. He is promoting policies to improve disclosure in lending and encouraging lenders to make sure that borrowers fully understand the terms of their loans so that fewer loans will end up in default, and fewer homes in foreclosure. He is encouraging the government to inform homeowners of the options that they have through the FHA.
The proposal itself a compromise. While it falls short of the help than the Democrats have asked for, it is more involvement in the mortgage foreclosure crisis than President Bush previously wanted.
No direct financial relief to homeowners is offered by the proposed plan. A bail out would have been very expensive and is not what is intended by the plan.
The Mortgage Bankers Association was happy with Bush’s announcement of the proposed plan and said, “Every foreclosure is a tragedy”.
Conservatives are critical of the plan. The proposed plan to help homeowners in financial distress, some say, gives the government too much involvement in the economy. Critics argue that the people who make financial mistakes are the people who should pay for them.
The new plan proposes to allow borrowers who currently have private sector mortgages refinance into FHA-insured loans and avoid foreclosure. Taxpayers aren’t going to be very excited about this part or the plan, because it is the taxpayers who will assume the risk on the new FHA mortgages. Private lenders will be paid in full with the refinancing of the mortgages.
If the plan is adopted, it will revive the FHA. The FHA has withered in recent years because it was unable to compete with aggressive subprime lenders due to existing regulations. The president has called for Congress to bring the FHA up to speed by passing a “modernization” bill that will allow the FHA to insure loans with lower down-payment requirements and higher loan limits.
The FHA previously could not refinance mortgages for homeowners who were in default on their mortgage loans, but the president is changing that fact. Such loans were previously deemed too risky, but now the FHA will be allowed to assume that risk.
President Bush unveiled the FHASecure plan, which will not require the approval of Congress, and "will allow families with strong credit histories who had been making timely mortgage payments before their loans reset—but are now in default—to qualify for refinancing", according to the FHA.
The FHA will also, for the first time in history, begin charging customers different interest rates based on credit scores beginning January 1, 2008. Higher interest rates will be paid by homeowners with lower credit scores.