Senate passes housing bill amid turmoil
Next stop is House, which will have another crack at amending foreclosure rescue bill's provisions.
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NEW YORK (CNNMoney.com) -- After months of debate on Capitol Hill, the Senate on Friday passed a comprehensive housing and foreclosure prevention bill.
But lawmakers' quest to help cure the ailing housing market is not over yet.
The Senate measure would create a new $300 billion government-backed foreclosure prevention program and strengthen oversight of Fannie Mae and Freddie Mac. The two mortgage finance giants, which play a central role in the U.S. housing market, took a thrashing this week on Wall Street as investors worried about their financial health.
Next week, the bill will go back to the House, which is expected to make technical changes and possibly some substantive ones as well.
The House passed a version of the bill in May and may try to amend some Senate provisions to bring them closer in line with its bill. Any changes will then need to be considered by the Senate.
That likely back-and-forth makes it uncertain when lawmakers will be able to send final legislation to President Bush for his consideration.
"It's not the final stop, but it's a major step," said one of the lead authors of the bill, Senate Banking Committee Chairman Christopher Dodd, D-Conn. "My hope will be that they would be willing to accept this Senate bill."
Final passage of a package has been delayed for close to two months due to substantive disagreements as well as countless procedural delays.
On Thursday, Dodd lamented how long it has taken to move the bill through. "Candidly, we can't wait any longer." He cited the latest foreclosure data, showing 250,000 new foreclosure filings in June, up 53% from a year earlier.
"A lot of us hoped the market would take care of all of this and there would be light at the end of the tunnel," Dodd said. "[But now] the only light at the end of the tunnel is a train coming."
The omnibus housing package attempts to address the housing crisis in several ways. Among them is providing more relief for some borrowers facing foreclosure; increasing access to mortgages in higher-cost areas; modernizing the loan guidelines for the Federal Housing Administration (FHA); and more stringently regulating Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500), both government-sponsored enterprises.
FHA role. Under the Senate bill, the FHA could insure up to $300 billion in new 30-year fixed rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down their loan balances to 90% of the current appraised value of their homes.
Lenders would also agree to pay upfront fees to the FHA equal to 3% of a home's appraised value. Borrowers must agree to pay an annual premium to the FHA equal to 1.5% of their new loan balance and they must also agree to share with the government any profit they realize from selling or refinancing their home.
The cost of the new FHA program - which would begin on Oct. 1 and be in place for just a few years - would be funded by fees from Fannie and Freddie. Thereafter those fees would finance an affordable housing trust fund also created by the bill. The House version of the bill calls for those fees to be used solely for affordable housing.
New regulator for Fannie and Freddie. The GSEs, which grease the wheels of the housing market by guaranteeing the purchase and trade of mortgages, will get a new regulator under the bill. That regulator, among other things, will have a greater say over how well funded the agencies are - a major concern in the markets that has sent stocks in both companies plunging.
"We know they play a central role in our housing. We also know that together they owe over $5 trillion in debt, and they're thinly capitalized. The way to keep them [from getting into worse shape] is to create a strong regulator to make sure they're adequately capitalized," Sen. Richard Shelby, R-Ala., another key architect of the bill, said Thursday on the Senate floor.
The investor flight from Fannie and Freddie that began on Monday was due to concerns that the firms weren't adequately funded relative to the amount of mortgage debt they own or back. Regulators and lawmakers went out of their way to reassure the public and investors.
"These institutions are fundamentally sound and strong," Dodd said at press conference Friday. "In fact, they're holding capital in excess today of what's currently required by federal law. ...[T]heir portfolios are made up primarily of 30-year fixed rate mortgages."
While the Senate bill calls for the immediate appointment of a new regulator, House Democrats want the appointment to be made 6 months from the date of enactment.
Conforming loan limits. The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to $625,000 from $417,000. The FHA maximum loan limits for high-cost areas would also increase to $625,000. The House bill raises the limit at all three agencies to nearly $730,000.
Higher loan limits will make it easier for borrowers to get mortgages, because they're more likely to be traded if they are considered conforming.
FHA rules. The bill would update a number of rules for FHA loans. Among them, it would increase to 3.5% from 3% the down payment requirement for borrowers in FHA loans. And it would eliminate a program that has allowed sellers to provide down payment assistance.
The House bill had contained a modified form of the down payment assistance program.
The seller-funded program is largely the reason why the agency's reserve has fallen by $4.6 billion, according to congressional testimony of FHA Commissioner Brian Montgomery. Currently, that reserve is roughly $16.4 billion.
Housing-related tax credits. The Senate bill includes more than $14 billion in tax credits. One is an $8,000 tax refund for first-time home buyers. The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years by the buyer.
Help states buy foreclosed properties. Despite a White House veto threat, the Senate bill still contains a provision that would provide states with $4 billion to buy and fix up foreclosed properties.
The House is expected to debate whether or not the provision should stay and also whether it should be paid for by raising an equal amount of revenue elsewhere. If not, it could be considered emergency spending, in which case lawmakers would not have to compensate for the cost of the provision. 
