Mortgage Crisis: How has the federal government responded?
The federal government's largest response to the mortgage crisis and rising foreclosure rates came in the Housing and Economic Recovery Act of 2008, which took effect on October 1, 2008. The act provided both new safeguards and increased regulation for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and contained provisions to assist troubled borrowers and to provide aid to the hardest-hit communities. The act also increased funding for community development block grants and homeowner counseling and created a first-time homebuyer credit, which was modified and extended by subsequent legislation. Previous federal action included establishing a program to counsel homeowners facing mortgage problems and increasing the limits on the size of mortgages obtained through the Federal Housing Administration (FHA) and the GSEs.
- The housing act granted the Treasury Department temporary authority to increase credit lines to Fannie Mae and Freddie Mac and purchase obligations or securities issued by the GSEs and accommodated that commitment by raising the national debt ceiling $800 billion to $10.6 trillion. It also creates an independent regulatory agency to oversee the GSEs. Finally, the act assessed the GSEs 4.2 cents per $100 of the value of new mortgages purchased or securitized during the year.
- The act aided homeowners by allowing certain at-risk borrowers to refinance with the FHA and providing $180 million for foreclosure prevention counseling and legal assistance. Aid to communities includes $4 billion in Community Development Block Grant funds to local governments to purchase and rehabilitate foreclosed homes. In order to prevent future crises, the bill established a loan originator licensing and registration system and increased mortgage disclosure requirements.
- The act also provided over $15 billion in tax benefits, including a tax credit for first-time homebuyers, a property tax deduction for non-itemizers, and an increase in mortgage revenue bonds for states. The Emergency Economic Stabilization Act of 2008 extended the property tax deduction through 2009, while the American Recovery and Reinvestment Act of 2009 and the Worker, Homeownership, and Business Assistance Act of 2009 extended the first-time homebuyer credit through April 30, 2010, and increased its value.
- The Congressional Budget Office estimates that the housing act will increase direct spending by $41.7 billion from 2008 to 2018. Revenues will rise by about $16.8 billion over this period, mainly from GSE assessments and tax provisions, reducing the act’s net cost to $24.9 billion over 10 years. Further modifications to the tax provisions will result in additional costs of $19 billion over 10 years.
- Congress established the National Foreclosure Mitigation Program in December 2007 to help states provide foreclosure prevention counseling and legal assistance. Under the program, NeighborWorks America, an existing public-private neighborhood redevelopment organization, will distribute a total of $475 million to housing counseling intermediaries approved by the Department of Housing and Urban Development and to state housing finance authorities.
- The February 2008 economic stimulus package increased the limits on loans made by the FHA, Fannie Mae, and Freddie Mac to $729,750, to expand access to affordable mortgage opportunities. The act limited the expansion for Fannie Mae and Freddie Mac to loans for single-family homes made between August 2007 and December 2008.
- Usually, debt forgiven or cancelled by a lender is included in taxable income. In December 2007, Congress passed a law excluding debt forgiven on a principal residence from income subject to tax. The Emergency Economic Stabilization Act of 2008 extended this provision from its scheduled expiration in 2009 to 2012.