Here’s the full text of President Bush’s remarks from earlier today. There is also a fact sheet outlining key aspects of the proposal, which warrants review as well. Essentially, the announced plan hits three areas:
FHA reform. Essentially, the President’s remarks today are intended to help push through FHA reform provisions that had passed the House of Representatives last year but became bogged down in the Senate. These reforms would lower down payment requirements and raise loan limits for eligible mortgages. The President also announced a program called “FHA-Secure,” designed to help borrowers already in arrears due to payment resets. According to various reports on this program — National Mortgage News provides a good concise summary — borrowers could roll up to 6 missed payments into a new FHA loan, but LTV can’t exceed 97.75 percent based on a new appraisal. Tax reform. As I had surmised, Bush wants to reform the tax code to make it so that short sales don’t treat the difference between the original mortgage balance and the short sale price as income — a practice that often delivers a surprising tax bill to the seller. Borrower education. The federal government is also throwing its weight behind foreclosure prevention and borrower education, although what exactly this “commitment” means wasn’t clarified.
Of the three areas, the tax reform proposal probably has the most merit and will have the most real impact — there are going to be plenty of borrowers needing to unload their properties in the next 12 months, and enabling short sales so that sellers aren’t penalized strikes me as not only practical, but the right thing to do here. It doesn’t stop losses to investors or lenders, of course — they still have to eat the loss, but it might prevent at least some foreclosures. The rest of the proposal may not amount to much. Changing FHA guidelines, for example, likely won’t impact the masses of troubled borrowers in Florida, California and other formerly high-flying markets that are seeing the most severe price corrections right now. The new guidelines would therefore seem most likely to help some borrowers in traditionally depressed housing markets (places like Detroit and parts of Ohio, for example). As with tax code reform, this is probably a good thing — it’s precisely what the FHA was designed to do — but it’s not nearly enough to prop up ailing housing markets on a national scale. In terms of the FHA-Secure program, if I’m understanding it correctly, the effectiveness of the program will likely be tied to lenders’ and investors’ willingness to forgive what may amount to large chunks of mortgage debt (including prepayment penalties in many cases) — the LTV requirement and the appraisal requirement essentially means that the government will provide a loan to a troubled subprime borrower only if the original lender eats up-front losses. And those losses could be huge. Assuming lenders and investors would even want to swallow that sort of poison pill, doing so would likely set a dangerous precedent — see my earlier commentary on a borrower bailout, because it applies here. Perhaps, however, the biggest reason that today’s announcement won’t mean much is that we’re now facing a mess that goes well beyond what even a reformed FHA can realisitically address. Another solution — and IMHO the best option I’ve seen discussed so far — has been percolating in private meetings at various Wall Street investment banks, something I’ll be blogging about later this weekend.