Wednesday, July 23, 2008

Housing Bill Adds Second Lien Amendment; DAPs to Be Eliminated

(Housing Wire) A sweeping housing aid package set to pass the House of Representatives added an important wrinkle Wednesday ahead of a key vote, while a long-controversial program for zero or little-money-down home purchases appears set to be relegated to the history books. According to a published report, the nearly 700-page long Housing and Economic Recovery Act of 2008, HR 3221, saw a vital new amendment added in final negotiations that would ostensibly give second lien holders some incentive to agree to having their positions wiped out as part of a program that would look to refinance troubled mortgages into loans endorsed by the Federal Housing Administration.

The Act would authorize the FHA to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; the lender must, however, first write-down principal loan balances to 90 percent of current appraisal value.

It’s a proposition that in many cases would mean wiping out second lien holders, leading more than a few market participants to suggest recently that lenders would be unlikely to participate voluntarily — or, at the very least, that first lien holders would be held hostage by second lien holders.

An amendment added to the bill in compromise negotiations between House and Senate leaders would apparently look to solve this problem by allowing second lien holders to share in future price appreciation, even as their existing lien is extinguished via the refinancing transaction.

National Mortgage News first reported on the new amendment Wednesday afternoon in a blurb on the trade publication’s Web site; a copy of the amendment was not immediately available for media review at the time this story was published, leaving some question exactly as to how second lien holders would be impacted and what their position would be.

Kiss down-payment assistance programs goodbye?
The House bill also adopts language from the Senate version of the package that would ban so-called seller-funded down-payment assistance programs; this was a hotly-contested area of difference when the Senate volleyed its version of the bill back to the House.

“We’re going to yield to the Senate on that,” House Financial Services Committee Chairman Barney Frank (D-MA) is quoted as saying in the Washington Post. “There are a lot of trade-offs in the bill.”

Seller-funded downpayment assistance allows property sellers, including largely home builders, to donate funds to a non-profit agency, which then “gifts” the funds to a borrower as a down payment on a new home. The non-profits make a tidy processing fee, while critics — and even government agencies such as the IRS — have for years blasted the practice as a legalized scam.

“These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller,” noted Felix Salmon in his highly-read economics blog at Portfolio.com. “I’m sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of [DAP programs].”

The DAP provisions have been among the most hotly-contested in the housing bill that has been generally a source of disagreement itself.

“Losing one third of the FHA’s business that uses downpayment assistance will deny annually over one hundred thousand qualified moderate income, minorities, first-time homebuyers and women-headed households from becoming homeowners,” said Ann Ashburn, president of AmeriDream, Inc., a large down-payment assistance provider.

The House was still debating the complete housing package at the time this story was published. A vote was expected before the end of the day.

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