Housing act depends on banks to refinance mortgages

First-time homebuyers, veterans, senior citizens and delinquent mortgage holders may benefit from the newly enacted housing bill. How well it will work may depend on regulators and your bank.

As many as 400,000 borrowers on the brink of losing their homes may be eligible for a more affordable loan backed by the Federal Housing Administration. The Housing and Economic Recovery Act, intended to stem home foreclosures and spark sales, also offers first-time buyers a tax credit of as much as $7,500 and extends protection to veterans facing foreclosure.

"The bill, we hope, is the way to rescue some people," said Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee and one of the key negotiators behind the legislation. "It's a way for the FHA to be the alternative lender for people so they don't have go to subprime lenders anymore."

Refinancing into the new government-backed program requires your current lender's approval. If the home's value is less than the mortgage - which real estate data provider Zillow.com estimates applies to almost one-third of American borrowers who bought in the last five years - the note's owner must also agree to reduce the amount owed on the house to 90 percent of its current appraised value.

The legislation is Congress's answer to U.S. foreclosures that may reach 2.5 million this year and next. Defaults among subprime borrowers with weak credit histories have helped flood the market with unsold houses and driven the median price lower for the first time since the Great Depression. Agencies that will implement the legislation are still working to understand it.

"There is every reason for this not to work," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School in Philadelphia and a former assistant HUD secretary under President Bill Clinton. "On every side there are logistic problems."

Borrowers who wish to refinance into cheaper FHA-backed loans will pay a fee of 3 percent of the loan amount at closing, either in cash or rolled into the mortgage. An additional insurance premium of 1.5 percent a year will be built into the borrower's monthly payment. Participating homeowners must also share half of any future property appreciation with the FHA.

Anyone who obtained a mortgage after Jan. 1 or whose mortgage payment is less than 31 percent of their gross monthly income won't qualify, according to the FHA Web site. The maximum loan will be $550,440, according to the FHA.

For mortgage owners such as JPMorgan Chase & Co. and Bank of America Corp., loans that might otherwise go to foreclosure would be traded for a smaller, more likely payoff, said Tom Kelly, spokesman for JPMorgan, which holds about $60 billion in first mortgages.

"The owner of a loan or a package of loans has to say `OK, I would rather have a known dollar amount for this loan and be done with it,' " Kelly said. "There is a lot of number crunching involved and a lot of judgment."

Unlike some state and federal programs, borrowers currently behind in their payments will be eligible, said Heather Wong, a spokeswoman for Frank.

The $7,500 one-time tax credit for first-time homebuyers is not exactly free money, rather an interest-free, 15-year loan. The homeowner would repay 1/15th of the amount to the government each year, $500 if they qualify for the full $7,500.

No single borrower with an adjusted gross income of more than $95,000 or married couple that makes more than $170,000 will be eligible, said Eric Smith, spokesman for the Internal Revenue Service.

"There is going to be a lot of misunderstanding later on," said Robert Strauss, an economics and public policy professor at Carnegie Mellon University in Pittsburgh who has advised the U.S. Treasury and Congress on taxes. "What's going to happen is that people are not going to pay it back."

The law also lengthens the time a lender must wait to foreclose on a veteran's house from three months to nine. Lenders to military personnel with adjustable-rate mortgages will have to wait an extra year to raise the minimum monthly payments.

Senior citizens interested in reverse mortgages will now find fees capped at a maximum of $6,000. The FHA is also in the process of establishing a new maximum loan limit for reverse mortgages, which allow people 62 and over to tap their home equity through a lump-sum payment, periodic checks, a line of credit, or a combination.

The program takes affect Oct. 1, 2008, and expires Sept. 30, 2011.