New Law is Net Benefit

The housing bill recently enacted into law is the most sweeping overhaul of the regulatory environment affecting mortgage lenders in many decades. Fortunately, the bill should help stabilize a beleaguered housing finance sector. But like all changes in laws and regulations, it comes along with many uncertainties.

A key issue for servicers, especially those managing large volumes of adjustable-rate mortgages that are poised to reset at higher payments, will be how well the law's provisions to spur the refinancing of troubled nonprime borrowers into FHA loans plays out. Those provisions are targeted toward "underwater" borrowers, those who owe more on their loans than their homes are currently worth. The Congressional Budget Office estimates that the FHA rescue program will finance up to 400,000 loans, or $68 billion of volume. It's a modest portion of those loans at risk of default, but it's enough to help mitigate the number of loans that are migrating toward foreclosure and REO status.

The FHA's foreclosure rescue program requires servicers and investors to cut the principal on the outstanding loan to reduce the loan-to-value ratio to 90%. That's probably a prudent step given the national decline in home prices, but it may add to pressure on servicers and investors to reduce principal for troubled borrowers more broadly.

Another question about the FHA rescue program, which goes into effect Oct. 1, is how its provisions for second liens will work. To qualify for the FHA refinancing, all second liens must be extinguished. That shouldn't be a problem where one lender/servicer holds both the first and second, but it will require negotiation and cooperation where the first and second are in different hands.

On balance, the bill looks like a net positive for the mortgage industry. By helping to stabilize the GSEs and expanding the FHA's ability to help troubled borrowers retain ownership, it should help put the brakes on home price declines.

But like any big piece of legislation, it will take time to see just how this housing act plays in the market. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/