The impact of the new major federal housing law on your bankruptcy practice.

            One of the biggest stories from Congress late last month was its passage, and President Bush’s signing (contrary to his earlier veto threats), of the Housing and Economic Recovery Act of 2008. The Act includes no changes to the Bankruptcy Code, in case you haven’t already assured yourself of this. 

      But this Act still has potentially significant, albeit speculative, consequence for the bankruptcy and debtor/creditor world. Putting aside the likely only tangentially relevant potential tax credits for limited first-time homebuyers, the major shoring up and regulation of Fannie Mae & Freddie Mac, and a variety of other only tangentially consequential sections of the 600+ page Act, the most directly relevant is the $300 billion expansion of the FHA’s authority for refinancing troubled mortgages voluntarily written down by private lenders. Congress estimates that about 400,000 homeowners will participate in this program, which start October 1, 2008.

      The practical question for attorneys with clients facing foreclosure is who qualifies for this program. To advise homeowners of their options appropriately, an attorney needs to determine if this new tool is worth pursuing. If a homeowner clearly does not qualify, then the attorney can rest assured that this option has been sufficiently investigated.

      Only owner-occupants are served by this new program, and only those who can establish (through IRS records and a mortgage debt-to-income ratio of greater than 31% as of March 1, 2008) that they are unable to afford their mortgage payments. The new loans will be for the lesser of 1) 90% of the home value and 2) the debtors’ ability to repay, based on current FHA affordability standards, the new 30-year, fixed-rate loans.

      But likely the one single factor that will disqualify most, although not necessarily all, homeowners who seek legal advice is that there be no subordinate liens on the property.

      One last interesting detail, under this program the FHA will share 50-50 with the homeowner both the new equity created by the new reduced loan on the property, as well as in any future appreciation, payable upon sale of the property or payoff of the FHA loan by future refinancing

Helpful LINKS for more information on this story:

1) About two pages of answers to 10 questions in a FAQ’s format, from the U.S. Department of Housing and Urban Development (HUD):

http://www.hud.gov/news/recoveryactfaq.cfm

2) A somewhat more detailed and thorough 4-page Summary of the Housing and Economic Recovery Act prepared for the public by the U.S. Senate’s Committee on Banking, Housing & Urban Affairs.

banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf

3) And for gluttons for absolute detail, all 636 pages of the Act (Pub.L. 110-389, H.R. 3221) are available at: http://www.docstoc.com/docs/979564/Housing-and-Economic-Recovery-Act-2008

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