Refinancing: Can the Government Really Help?

Government programs designed to help America out of the housing crisis may finally get pushed through to implementation. How much relief these programs can provide, however, remains to be seen.

Like an old cartoon, the U.S. housing industry is lying on the train tracks, bound and gagged, nervously waiting for the locomotive of foreclosures to pass. The feds are trying to work out some kind of rescue plan, but no one's sure what it will take to stop that train.

Dudley Do-Right's on the way

On July 26, 2008, the U.S. Senate approved a housing relief plan and sent it off to President Bush for approval. The plan, formally known as H.R. 3221, is the long-awaited federal response to a housing crisis that's been gaining steam for many months. The plan incorporates these provisions, among others:

• The Federal Housing Administration (FHA) will be armed with relaxed underwriting standards and an additional $300 billion of lending authority; these tools are intended to support the refinance of an estimated 400,000 at-risk mortgages.
• The Treasury Department will be temporarily authorized to lend money to the troubled mortgage entities, Fannie Mae and Freddie Mac. Fannie and Freddie currently support more than $5 trillion in U.S. mortgage debt.
• States will have an additional $11 billion in tax-free municipal bond authority; the monies are earmarked to support mortgage refinances for subprime borrowers, and new mortgages for first-time borrowers.
• Limits on Fannie Mae, Freddie Mac, and FHA loans will be permanently raised to $625,000 in high-cost areas.
• New tax breaks will be available for homeowners, including a $7,500 tax credit for those who purchase their first home between April 9, 2008, and July 1, 2009.
• The most devastated communities will have access to funds that can be used to mitigate the local effects of foreclosures.
• Funds will be set aside to provide counseling and legal services to at-risk borrowers.

Rescue uncertain for some

Experts estimate that about 2.5 million homeowners will fall into foreclosure in 2008. While the federal rescue plan is extensive, it's unlikely that it can save all, or even most, of these homeowners. In reality, there's little that can be done to help borrowers who owe more than they can pay, and more than their property is worth.

Further, there's the momentum problem. The tide of foreclosures has created other circumstances which threaten to pull even more households into a crisis situation. Declining property values are leaving borrowers over-extended on their home equity lines of credit, while slowing residential construction activity has caused many to lose their jobs. These conditions combined could spell disaster for many-even for borrowers who hold conservative, fixed-rate mortgages.

Freeing the housing industry from the binds of tight credit and rising foreclosures is going to take time. The hope is that the federal rescue plan can reverse the crisis before too many borrowers get thrown under the train.