What does the new housing bailout bill do?

By Joel Persinger
YourRealEstateDude.com

The recent signing of the Housing and Economic Recovery Act of 2008 by President Bush has a great many distressed homeowners clambering to find out how much help the new law might actually provide. Many of these folks are desperate to find some way to keep their homes and are hopeful that this new law might provide some new options to help them do it.

Like most laws passed these days, this new housing act makes changes in many areas. Among other thing; it raises the conforming loan limits, increases regulation of Fannie Mae and Freddie Mac, modernizes some FHA programs, creates some tax incentives, establishes new licensing requirements and gives birth to something the House of Representatives called the “Hope for Homeowners Program.”

During the run up to the signing of this bill, just about every news story that I saw focused more on the possible bailout for distressed homeowners than on any other part of the bill. This is precisely because the law provides an opportunity for some distressed homeowners to refinance their existing high interest rate loans into new, affordable FHA-insured loans based upon the current market value of their homes. That’s right… current market value. If the home was worth $600,000 when you purchased it and it’s only worth $400,000 now, the new loan would be based upon the $400,000 current value. It sounds like a miracle! Still, there are some limitations that you should know about.

While the program appears to be a good one, there are some hitches that borrowers should be aware of before they dive in. First of all, this program is not available to everyone. In order to be eligible, borrowers must have taken out their current loan on or before January 1, 2008. They must also certify that they did not intentionally default on their original mortgage or any other debts as well as declare that they did not provide false information in order to obtain the loan. If the borrower has been convicted of fraud or has previously defaulted on a government loan that borrower is not eligible. The borrower must also meet other standards established by the program’s governing board, including documenting income by use of the borrower’s two most recent tax returns. But, the biggest obstacles for the homeowner to overcome are these: the borrower’s current lender has to agree to take the loss and the borrower has to agree to share any future equity they may gain the home with the government on a 50/50 split. Like my grandfather used to say, “There’s no such thing as a free lunch.”

Still, if you’re trying to save your home, this new law and the program it provides may just be the ticket. But, be careful, get lots of advice and remember that this is new to those in the real estate industry too, and it may take a while before we “experts” have a full grasp of all the possibilities.