30 July 2008

United States Moves to Shore Up Troubled Housing Sector

Legislation aims to avert mortgage, credit crisis

Treasury Secretary Henry Paulson discusses the current mortgage finance crisis.

By Merle D. Kellerhals Jr.
Staff Writer

Washington -- Working to reduce the impact of the troubled U.S. housing market on the American economy and the world financial system, President Bush has signed into law a measure that will provide Treasury support to the nation's two largest mortgage companies and rescue thousands of homeowners facing foreclosure.

Under the 2008 Housing and Economic Recovery Act Bush signed into law July 30, the U.S. Treasury will be given authority until the end of 2009 to extend an unlimited line of credit to Fannie Mae and Freddie Mac, or to buy stock in the companies if their condition worsens in the next 18 months.  Fannie Mae and Freddie Mac are congressionally chartered, government-sponsored enterprises and, coupled with the Federal Home Loan Banks and the Federal Housing Administration (FHA), fund 70 percent of the residential mortgages in the United States.

By law, Fannie Mae and Freddie Mac can buy mortgages only for single-family and multifamily homes that other institutions have made, which severely limits financial diversification in times of economic stress.

"It is of the utmost importance to our market and economic stability that the [government-sponsored enterprise] portions of this bill become law," Treasury Secretary Henry Paulson said after final congressional passage of the legislation.  "These components are orders of magnitude more important to turning the corner on the housing correction."

The federal debt limit will be raised by $800 billion to $10.6 trillion to provide a cushion for this assistance.  In addition, the nation's central bank -- the U.S. Federal Reserve, informally known as the Fed -- allowed Fannie Mae and Freddie Mac on July 13 to begin borrowing directly from the New York Federal Reserve Bank.

White House spokesman Tony Fratto told reporters July 30 that the president looked "forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac."

At the same time, the Fed has been given a new "consultative" role overseeing the operations of Fannie Mae and Freddie Mac.

Senate Banking Committee Chairman Christopher Dodd said that the United States is "in the midst of the most serious economic crisis to face our nation in many years."  He said the new law will help homeowners faced with foreclosure, but, more broadly, it will reassure financial markets.

The measure Bush signed does the following:

• includes $15 billion in tax cuts, including expansion of low-income housing tax credit, and a credit of up to $7,500 for first-time homebuyers for houses bought between April this year and July 2009;

• permanently increases to $625,000 the size of mortgages that Fannie Mae and Freddie Mac can buy and that the FHA can insure;

• sets up a $300 billion fund for new, affordable loans under the FHA to assist approximately 400,000 homeowners facing foreclosure;

• provides $11 billion in federal tax-exempt private activity [covered] bond authority to provide for refinancing subprime home loans for first-time home buyers and multifamily rental housing;

• sets up the first federal licensing system for U.S. mortgage brokers and loan officers; and

• increases federal oversight of Fannie Mae and Freddie Mac, which currently hold about half of the $12 trillion in U.S. home mortgage debt.