There is a lot of debate about this recent bill passed by Parliament, and many do not know why President Bush will veto the law. With the proposed bill, the FHA would insure up to $300 billion in new loans over four years. Lenders will have to reduce the principal amount of the mortgage to qualify for a loan of 85% of its value. If someone fails to meet their mortgage in a market that has fallen by 125%, they can refinance the FHA loan against a loan of 85% of its value. The lender that owns the mortgage securities will suffer from profits, and in general the cost to lenders will be about $2.7 billion.
On the positive side, 500,000 mortgage-backed foreclosures will be averted and $300 million has already been allocated to anti-mortgage fraud and counselling. But the taxpayer will cost $1.7 billion, which many don’t support. If all these dysfunctional homes are refinanced by 85%, the market should fix many areas, but these borrowers will have to meet the FHA requirements. This week it will be a very hot topic on Wall Street, as many believe that this law will always be passed and will eventually win the president. The four-year plan seems long enough for the market to self-adjust, especially if all these stock distortions are adjusted through refinancing.
Finally, their needs must eventually solve this mess. People continue to hand over their keys instead of mortgage payments, which are beginning to destroy neighborhoods and communities and continue to devalue these properties across the country. Saving the FHA is an important step in dealing with all these bad mortgage repayments and helping the homeowner refinance to obtain a more stable mortgage. Lenders cannot continue to lose money because 300 of them have already gone bankrupt since the end of 2006.