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Big housing bill: no rescues soon

Help for strapped homeowners may not be forthcoming until next year; ramping up the new government programs will take months.

By Ron SchererStaff writer of The Christian Science Monitor / August 1, 2008

New York

The $300 billion housing-rescue legislation that President Bush signed Wednesday is partly designed to pull some 400,000 homeowners out of foreclosure.

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With more than 2 million foreclosures expected this year, who will be saved?

The short answer: This year, very few people.

Groups that help financially strapped homeowners are warning that the rules governing the new federal rescue may not be ready until October. Moreover, by the time the federal government gets ramped up, help may not be forthcoming until next year. That may be too late for the 1.8 million people who entered foreclosure proceedings in the first half of the year.

"The bottom line is [that] the full set of eligibility is not yet developed," says Jim Carr, chief operating officer of the National Community Reinvestment Coalition in Washington. "Once the details are fleshed out, it will take months to ramp up and train people." The idea is to help troubled borrowers who took out loans before Jan. 1, 2008. A homeowner has to be able to afford a loan worth 87 percent of the appraised value of his or her primary home. Just as important, the lending bank must agree to take a loss on the loan, which then becomes part of a federal portfolio, in essence owned by the Federal Housing Administration (FHA). The homeowner also must agree to split profits with Uncle Sam if the home rebounds in value and is sold.

"Implementation will be the biggest challenge," says Sharon Price, director of policy at the National Housing Conference, a solution-oriented nonprofit based in Washington. "For example, it's up to the lenders whether or not they want to participate."

The incentive for mortgage lenders is that they get a government guarantee on the balance of the loan.

"It limits their downside," explains Bob Litan, a senior fellow at the Brookings Institution in Washington. "If you are a bank and you think property values are only going to get worse, it's better to take a little hit now."

The Congressional Budget Office, in an analysis of the legislation, estimated it would affect about 400,000 loans over four years. Housing experts anticipate most of the applications will be in the first two years.

"Unless a lot of lenders come forward in the next year, this bill will be viewed as a failure," says Mr. Litan.

Getting the program up and running will take some time. One former HUD employee recalls it took four months this year to get the banks ready to offer a new product called FHA Secure, a program designed to help at-risk borrowers.

The largest bank in the US, Bank of America, lobbied hard for the bill. Bank of America, which acquired Countrywide Mortgage, could have hundreds of thousands of mortgages that qualify.