Real Estate Insights

Here is one step in the right direction; today, President Bush is beginning to respond to the current subprime-mortgage crisis and has begun to outline a series of policy changes and recommendations today to help borrowers avoid mortgage default and foreclosure.

First on the list is an administrative change to allow the Federal Housing Administration, which insures mortgages for low and middle income borrowers, to guarantee loans for delinquent borrowers. Currently the FHA cannot lend to borrowers who are in default. The change is intended to help those borrowers who are at least 90 days behind in payments stay in their homes and avoid foreclosure. The idea is that the guarantees will help mortgage default homeowners by allowing them to refinance under government programs that offer more favorable rates.

Mr. Bush will also ask Congress to suspend, for a limited period, an Internal Revenue Service provision that penalizes borrowers who refinance the terms of their mortgage to reduce the size of the loan or who lose their homes to foreclosure. Currently in California, when borrowers are foreclosed on and the bank ends up selling the borrower’s home for a loss, the bank would, under the IRS provision, be able to report the loss to the IRS as income to the borrower – which the borrower would then have to claim on his income tax returns as income earned for that year thus increasing the borrower’s taxable income.

And he will further announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers. This comes also as a recommendation by current Fed chairman Ben Bernanke who wrote “the private and public sectors, separately or in collaboration, could help the current mortgage situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance. Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms. They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example."

The moves are the first visible steps the Bush administration has taken to help stem the fallout from the subprime crisis, which has roiled financial markets and threatened to contaminate the housing sector. Defaults and foreclosures are increasing as borrowers -- many of whom got interest-only or no-money-down loans -- begin having trouble making their mortgage payments as higher rates kick in. Many homeowners believed they could refinance their loans, but that has become much harder as lenders tighten their standards, or even stop lending to high risk borrowers, in the face of mortgage defaults and foreclosures.

With more than two million loans expected to adjust to higher rates over the next two years, possibly triggering many more defaults, the Bush administration is looking for ways to stem the damage.