NEW YORK (CNNMoney.com) — The Senate began debate Thursday on a $15 billion bipartisan housing relief package that could get a final vote by next week.
The legislation was crafted Wednesday by Democratic and Republican lawmakers facing election-year pressure to fast-track a response to the foreclosure crisis.
The package has gotten praise from the mortgage industry, but housing advocates say it only offers homeowners modest help and is too generous to homebuilders.
The proposed measures include funding to help borrowers refinance unaffordable loans and help boost activity in neighborhoods with properties in foreclosure. Also in the bill is a tax break for homebuilders, as well as a new tax credit and deduction for homeowners and home buyers. The package also contains measures to make loans that are insured by the Federal Housing Administration – which helps borrowers with weak credit or little or no cash for a downpayment – more accessible.
The Senate package reflects concessions from both sides of the aisle. But it will be subject to amendments, which the Senate started voting on Thursday night. In addition, the House – led by Financial Services Committee Barney Frank, D-Mass. – will have its say next week.
“It’s not the end of the road, but it’s a very strong beginning,” said Senate Banking Committee Chairman Christopher Dodd, D-Conn., in a press briefing Wednesday evening.
The Democrats allowed two provisions they’ve been pushing for to be excluded from the package: a measure that would let bankruptcy judges reduce residential mortgage debts, and a measure that would let the Federal Housing Administration insure up to $400 billion in troubled loans if lenders agree to write them down to affordable levels for borrowers.
The bankruptcy measure was introduced as an amendment Thursday evening but was voted down. That doesn’t mean, however, that the House can’t reintroduce it.
Senate Democrats also yielded ground on a provision to change the down payment requirements for FHA loans. Democrats have been pushing to reduce them, but the bipartisan agreement actually increases them by half a percentage point. That may not fly in the House, when it considers the package.
In exchange, Senate Republicans agreed first to not block a housing stimulus package. They also gave the nod to a $4 billion provision that would let states and local governments buy and refurbish foreclosed properties, a measure the White House had characterized as a bailout for lenders and speculators. And they agreed to include a number of other provisions that had been included in Democrats’ earlier housing relief proposals.
Homebuilders get big boost
Forty percent of the cost of the bill will fund a business tax break expected to help homebuilders. One construction workers’ union characterized the provision as a “taxpayer funded giveaway to big corporate homebuilders, many of which helped cause the mess by pushing subprime loans through their mortgage subsidiaries.”
But supporters of that measure say it will help keep all homebuilders – large and small – out of bankruptcy and will preserve thousands of jobs.
The Mortgage Bankers Association gave the total package high marks. “A more modern and effective FHA, mortgage revenue bonds for state housing finance agencies, additional money for counseling – these are all things that will be of great help to struggling homeowners,” said MBA Chairman Kieran Quinn in a statement.
Housing advocates like some elements of the package but don’t think it goes far enough, particularly because it excludes the bankruptcy provision, which they estimate could keep up to 600,000 homeowners out of foreclosure.
Ellen Schloemer, research director for the Center on Responsible Lending, said the point of the provision isn’t to encourage homeowners to file for bankruptcy. Rather, she said, “it would give loan servicers air cover to modify loans. And it [gives them] incentives to do it.”
Currently loan modifications are done on a voluntary basis. And servicers, who fear being sued by investors who own the loans, are only allowed to modify mortgages when they can justify why doing so would be a better solution than anything else.
Republicans object to the bankruptcy provision, contending it would raise mortgage costs for everyone, since lenders would price in more risk if they knew a third party could alter the loans’ terms. Some studies have shown, however, that cost increases would be minimal.
In proposing the bankruptcy provision as an amendment, Democrats may modify it further to win some Republican support. One approach: judges would only be allowed to change the interest rate on the loan, but not the principal.
What’s in the bipartisan bill?
Modernize the FHA: Measures in the bill would overhaul the Federal Housing Administration’s loan insurance program, which helps homebuyers with weak credit or little cash get an affordable mortgage.
The changes proposed in the bipartisan bill would raise the FHA loan limits from 95% of an area’s median home price to 110%. But in high-cost areas, the FHA loan limit may not exceed $550,000.
Under the bipartisan economic stimulus package passed in February, the cap for FHA loans in high-cost areas was temporarily raised to $729,950. The Senate package also calls for FHA loan down payment requirements be raised to 3.5% from 3%.
Help for troubled borrowers trying to refinance: The bill lets states offer $10 billion in tax-free municipal bonds, the proceeds of which would be used to subsidize mortgage refinancing for subprime borrowers trying to get out of unaffordable loans.
Under current law, state and local housing agencies are allowed to issue tax-free bonds only to help subsidize mortgages for first-time homebuyers, or those purchasing property in distressed areas.
Tax credits for buying troubled properties: The bill creates a tax credit of $7,000 for homebuyers who buy foreclosed homes or homes where the current owner is in default.
New property tax deduction: For the 28.3 million homeowners who take the standard deduction on their federal tax return, the bill would allow them to take a second standard deduction for the property tax they pay. The new standard property tax deduction will be $500 for single filers and $1,000 for couples filing jointly. Currently only homeowners who itemize their deductions can deduct their property taxes.
Bigger tax break for homebuilders and other businesses: The bill would expand the so-called net operating loss carryback. The provision would extend to four years from two the time company may apply its 2008 and 2009 losses to past tax bills.
Money to aid areas hit by foreclosures: The bill would allow $4 billion in grants to state and local governments to buy and rehabilitate foreclosed home.
More money for consumer counseling: The bill calls for an additional $100 million for housing counselors working with homeowners at risk of foreclosure.
Greater transparency for borrowers: The bill might call for greater disclosure in the mortgage application process, so consumers could more easily understand the terms of their loans and won’t be surprised by big payment increases