Home-Buddies

Foreclosure Legislation Passed

As “yours truly” anticipated, politicians gave in to political pressure and passed Foreclosure Legislation. Even though this legislation was “blown in” by the election year political winds, we should still applaud because it will greatly support home values and provide mortgage markets with a much needed boost of confidence.

Summary of Foreclosure Legislation

First and foremost the legislation allows FHA to insure up to $300 billion in mortgages. In addition, the FHA loan limit is increased from 95% to 110% of area median home price. And an additional cap at 150% of government-sponsored enterprises (GSE) limit (currently, $625,000). Finally, this legislation (Federal Housing Finance Regulatory Reform Act of 2008) establishes a new, independent regulator for Fannie Mae, Freddie Mac, and Federal Home Loan Banks.

Economic Impact

Critics claim that the legislation is “too little too late” and/or it is just a bailout for people that took unnecessary risk in real estate. This is probably true; however, as an economist here is my view on how it will impact the markets and the economy. First, one of the biggest problems with credit markets is that markets are fearful and frozen, in part, because bank and other financial institutions do not know what their sub-prime mortgages are worth. This uncertainty has caused lenders to hoard capital, which in turn is hindering the flow of necessary capital to encourage economic growth. With the new Foreclosure Legislation, lenders will once again have confidence to lend because there will now be a “back stop” against the mortgage backed securities on their balance sheets. In addition, the new capital availability (i.e. $300 billion in FHA) will be a much needed fiscal stimulus for the economy. In conclusion, regardless of how critics feel, the alternative of not providing this legislation would have been worse for the average American.

Now that we have Foreclosure Legislation to help get the mortgage mess under control, lenders should settle down over the next six months. This will happen because lenders now have a floor on how far their mortgage backed securities can fall. Armed with this knowledge, they will be able to ensure that they have the capital needs to cover these assets. In turn this will allow lenders to stop focusing on covering the falling assets and instead focus on lending more to markets. This action should ensure price stability and hopefully a recovery for many hard hit real estate markets.

Cliff Pape

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