Senate passes major bills offering mortgage relief


December 23, 2007|By KEN HARNEY

Reversing months of inaction in a single day, the Senate passed two major bills Dec. 14 that could help thousands of homeowners now struggling with unaffordable mortgages or heading for foreclosure.

The long-stalled FHA Modernization Act - which would reduce down payments and raise maximum mortgage amounts for Federal Housing Administration-insured loans - passed the Senate by an overwhelming 93-1 vote. Senators also approved the Mortgage Forgiveness Debt Relief Act, which would remove the controversial tax on "phantom income" when lenders forgive portions of the balances on mortgages of financially stressed homeowners.

Versions of both measures had already passed the House. The differences between the Senate and House bills will need to be resolved by conference committee before being sent to the president for his signature.

Besides eliminating the phantom income tax for three years, the Senate's debt relief bill also extends the tax deductibility of private and FHA mortgage insurance premiums through 2010. That benefit had been scheduled to expire at the end of this month.

The bill also provides capital gains tax relief to surviving spouses who sell houses at substantial profits. Under current law, surviving spouses who have not wed again can only qualify for the full $500,000 tax-free capital gains exclusion if they sell during the tax year in which their husband or wife died. Otherwise, they qualify only for the $250,000 exclusion.

Under the Senate's bill, however, if a sale occurs no later than two years after the death of the spouse, and the residence met the eligibility tests for the full $500,000 "immediately before" the spouse's date of death, the survivor would still be eligible for the full $500,000 exclusion. Since surviving spouses typically receive the deceased spouse's tax "basis" in the property, it was not immediately clear why the Senate bill's change to the tax code is needed.

The FHA modernization bill - once the House and Senate agree on a final version - should provide critical help to large numbers of homeowners stuck with subprime mortgages heading for unaffordable payment jumps. Most important, the range of consumers assisted will extend to higher-cost areas of the country - especially California, the Northeast and the mid-Atlantic states.

The Senate bill raises the FHA's statutory loan amount limits to $417,000 - the same ceiling as Fannie Mae and Freddie Mac. But the House version would tie the limits to median home prices and could authorize FHA-insured loans in excess of $700,000 in expensive markets such as San Francisco.

The House bill also would allow FHA applicants to obtain loans with zero down payments; currently the minimum is 3 percent down. The Senate's version would require down payments of at least 1.5 percent. The House bill authorizes the FHA to vary insurance premium levels by applicant risk categories; borrowers who make minimal or no down payments could be charged higher premiums. The Senate bill would impose a one-year moratorium on a risk-based pricing system developed by FHA and currently scheduled to take effect Jan. 1.

FHA loans, which faded in popularity during the subprime boom years of 2001-2006, are now regaining their earlier market share. Not only do FHA's fixed-rate loans cost much less than subprime alternatives - often by 3 to 4 percentage points or more - but they also come without prepayment penalties and have relatively flexible and generous underwriting terms.

Paul E. Skeens, head of Carteret Mortgage Corp. in Waldorf, says FHA is far more lenient on credit history issues than any of its competitors, and routinely funds applicants who have prior bankruptcies and foreclosures in their files.

With a zero down payment option as in the House-passed bill, "FHA will be the best solution anywhere in the market" for people with moderate incomes, first-time purchasers, and those with less-than-perfect credit, Skeens said in an interview. He believes even many buyers with prime credit will apply for fixed-rate, consumer-friendly, FHA-insured mortgages once the higher loan limits kick in.

In a head-to-head comparison of a hypothetical new $417,000 mortgage with zero down payment and 6.25 percent fixed rate for 30 years, Skeens said an FHA-insured loan would have lower monthly payments that either Fannie Mae's or Freddie Mac's directly competitive nothing-down programs.

On such a loan, according to Skeens' estimates, FHA borrowers would pay $2,779.80 a month - including all insurance and fees - versus $2,877.57 a month for a Fannie Mae mortgage. Individuals with high credit scores might be able to qualify for a Fannie Mae zero-down program that requires no separate monthly private mortgage insurance payments, but that would raise the interest rate from 6.25 percent to 6.75 percent. In that case, says Skeens, the Fannie Mae option would be about $75 cheaper a month.

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