LEGISLATIVE BULLETIN | April 4, 2008

H.R. 3221, as amended, The Foreclosure Prevention Act of 2008 (SA 4387)

Summary and Background 

On February 13, 2008, Senate Democrats introduced a legislative package intended to address the national housing crisis and help Americans avoid foreclosure. TheForeclosure Prevention Act of 2008 is an important next step that builds on recently-enacted economic stimulus legislation. The bill would address some of the problems spawned by a housing foreclosure crisis that has threatened America's hard-working families, their communities, and our local and national economies.

If enacted, theForeclosure Prevention Act of 2008, as amended,would:

•Expand and enhance the Fair Housing Administration to ensure that additional families can benefit from safe, fixed-rate mortgages; 

•Increase mortgage foreclosure protections for servicemembers; 

•Help communities impacted by foreclosuresby allowing localities with high foreclosure rates to access Community Development Block Grants (CDBG) funds to purchase foreclosed properties for rehabilitation, rent or re-sale;

•Help families keep their homesby increasing pre-foreclosure counseling funds and expanding refinancing-opportunities;

•Help families avoid foreclosure in the futureby amending the Truth-in-Lending Actto improve loan disclosures during the original loan and refinancing process; and

•Provide tax relief for homeowners, homebuyers, and homebuildersto help the housing market recover.

This Legislative Bulletin provides a description of major provisions, anticipated amendments, legislative history, the Statement of Administration Policy, and links to related readingresources.

 

Major Provisions 

Title I: FHA Modernization Act of 2008 

To ensure that additional families can access the Fair Housing Administration (FHA) program, which provides safe, fixed-rate mortgages, the Foreclosure Prevention Act of 2008 includes significant FHA reform that would modernize, streamline, and expand the reach of the FHA program. Title I of this legislation is comprised of the provisions contained in the FHA Modernization Act of 2008 (S. 2338), a bill that was approved by the Senate on December 14, 2007 by an overwhelming 93-1 vote. 

Specifically, the Foreclosure Prevention Act of 2008 would: 

•Expand the benefit of FHA insurance to a larger number of families in need, by: 

o Increasing the FHA loan limitfrom 95 percent to 110 percent of area median home price with a cap at 132 percent of GSE limit (currently, $550,000), allowing families in all areas of the country to access homeownership through FHA; 

o Requiring downpayments of 3.5 percent for any FHA loan; 

o Restructuring FHA insurance for manufactured housing, which provide an affordable housing option for approximately 17 million Americans; and 

o Increasing consumer protections for residents of manufactured homes.

 

•Enhance counseling requirements to help provide for stable homeownership, especially for low- and moderate-income homeowners who are having trouble making their mortgage payments and first-time home buyers; 

•Enable more seniors to safely convert their home equity into cash through Home Equity Conversion Mortgages ("HECM"). HECMs allow seniors to convert equity into cash by taking out a "reverse" mortgage where the lender pays the borrower either a lump sum or a monthly payment. The borrower makes no payments until the ownership of the home is transferred through sale or inheritance; 

•Support homeownership preservationby improving the FHA loss mitigation process so that more troubled homeowners can retain their homes; 

•Enhance fraud protection byestablishing a screen to detect and prevent fraud, and by increasing the penalties for committing fraud against FHA; 

•Expand access to credit for borrowers with "thin" credit histories byestablishing a five-year pilot program to test alternative automated credit rating systems for borrowers without sufficient credit histories at traditional credit bureaus.

 

Title II: Mortgage Foreclosure Protections for Servicemembers 

The Foreclosure Prevention Act of 2008 would provide a temporary increase in the maximum loan guarantee for loans guaranteed by the Secretary of Veterans of Affairs (loans that originate from the date of enactment until the end of 2008) by an amount equal to 25 percent of: 1) the Federal Home Loan Mortgage Corporation Act's section 305(a)(2)-determined limit for a single-family residence for the year of origination; OR 2) 125 percent of the area median price for a single-family residence (provided the amount does not exceed 175 percent of the section 305(a)(2) limit), whichever is higher. 

The bill would also require the Secretary of Defense to create mortgage and foreclosure avoidance counseling program for servicemembers returning from service on active duty abroad. 

The legislation would amend the Servicemembers Civil Relief Act to temporarily (sunset on December 31, 2010) extend the period a lender must wait before starting foreclosure proceedings from three months to nine months after a serviceperson returns from service. This title would also suspend increases in mortgage interest rates in excess of six percent for one year after a serviceperson ends his/her service (the suspension is also in affect during the service period). "Interest" would include service charges, renewal chares, fees, or other charges (except bona fide insurance).
 

Title III: Emergency Assistance for the Redevelopment of Abandoned and Foreclosed Homes 

The Foreclosure Prevention Act of 2008 would provide $4 billion in emergency assistance to communities with the highest foreclosure rates for the purchase and redevelopment of abandoned and foreclosed-upon properties. Other factors that would be considered in determining need are the rates of subprime mortgages and the rates of default or delinquency. The funds would be administered through the Community Development Block Grant (CDBG) program, and all funds would be used to help individuals and families whose incomes do not exceed 120 percent of the area median income (moderate income persons). Moreover, at least 25 percent of the funds appropriated would be used to house individual and families whose incomes do not exceed 50 percent of area median income (low income persons). Any profit from the sale, rental, rehabilitation or redevelopment of these properties would be reinvested to further the goals of this title.

 

Title IV: Housing Counseling Resources

The Foreclosure Prevention Act of 2008 would provide $100 million in additional funding that would help housing counselors continue their outreach to families at risk of foreclosure. These added funds would help as many as 250,000 additional families connect with their mortgage servicer or lender to explore options that will help them keep their homes.

 

Title V: Mortgage Disclosure Improvement Act 

The Foreclosure Prevention Act of 2008 would encompass the Mortgage Disclosure Improvement Act of 2008, which would amend the Truth-in-Lending Act (TILA)to expand the types of home loans subject to early disclosures and improve loan disclosures given to individuals and families on original and refinancing home loans. The bill would require that mortgage loan terms be disclosed no later than seven days before closing, and, if the terms change, no later than three days before closing. Moreover, in the case of variable rate mortgages, the maximum loan payment would be required, not only at application, but no later than seven days before closing, and if it changes,no later than three days before closing. 

The bill would also clarify that lenders are subject to statutory damages for violations of TILA disclosure provisions and increase the maximum damages for mortgage violations from $2,000 to $4,000 per violation.

 

Title VI: Tax-Related Provisions 

The Foreclosure Prevention Act of 2008 also includes a package of tax relief measures developed by Senate Finance Committee Chairman Baucus and Senator Grassley for homeowners, homebuyers, and homebuilders aimed at helping the housing market recover. These provisions, expected to total nearly $11 billion over 10 years, would keep property values up, keep people in their homes, and keep businesses afloat. 

Specifically, the Foreclosure Prevention Act of 2008 would provide for: 

• A standard property tax deduction for homeowners who do not itemize their federal taxes. To make tax relief available to all American homeowners, the bill will provide a standard deduction - $500 for single filers and $1,000 for joint filers - for the 28.3 million non-itemizers who pay property taxes. Present law allows only those who itemize deductions on their federal tax returns to deduct state and local property taxes from their income. 
   
• Expansion of mortgage revenue bonds to help homeowners and buyers obtain affordable loans. To provide for refinancing of subprime loans, mortgages for first-time homebuyers and multifamily rental housing, $10 billion of federal tax-exempt private activity bond authority is included in bill. The measure also exempts interest earned on the bonds from the alternative minimum tax.
   
• Extension of net operating loss carryback that would allow companies losing money in the economic downturn - such as America's homebuilders - to write off more of their current losses. To aid homebuilders and other businesses hit hardest by the economic slump, this bill will extend a law allowing corporations to apply excess net operating losses to tax returns from prior profitable years and receive any applicable refunds. For 2008 and 2009 losses, the provision would extend the "net operating loss (NOL) carryback" to four years (back to 2004 and 2005, respectively) from the two years currently in law. Measures to prevent companies from abusing the intent of the provision are also included.
   
• Tax Credit for Purchase of Homes in Foreclosure. To encourage the purchase of homes already in foreclosure and of homes on which foreclosure has been filed, this bill creates a $7,000 tax credit for buyers of such homes, to be claimed over two years. Homes in foreclosure bring down the value of property nearby. Encouraging the purchase of more homes in foreclosure will restore property values for all homeowners.

 

Legislative History 

On February 13, 2008, Majority Leader Reid introduced the Foreclosure Prevention Act of 2008 (S. 2636), which was placed on the Senate Legislative Calendar under General Orders (Calendar No. 577). On February 14, a motion to proceed to the consideration of H.R. 3221 was presented in the Senate as a vehicle to consider S. 2636 as a substitute amendment. On February 28, the cloture on the motion to proceed to H.R. 3221 was not invoked by a roll call vote of 48-46 (Record Vote Number 35, available here). 

On April 1, the Senate agreed to a motion to reconsider this vote by a 94 to 1 vote (Record Vote Number 35, available here). The Majority Leader asked Senators Dodd and Shelby to develop a bipartisan compromise version of the Foreclosure Prevention Act of 2008. That legislation was completed on April 2. 

On April 3, the Senate resumed consideration of the motion to proceed to H.R. 3221, the vehicle for the housing legislation. H.R. 3221 would be amended in its entirety by the new version of the Foreclosure Prevention Act of 2008 (S.A.4387).

 

Amendments 

It is anticipated that several amendments will be offered to the Foreclosure Prevention Act of 2008, including the following amendments (those that the DPC has received information on): 

•An amendment (S.A. 4388) offered by Senator Durbinto include the Helping Families Save Their Homes in Bankruptcy Act, as modified, which would change the Bankruptcy Code to allow a judge to modify the mortgage of a debtor. This amendment was included in an earlier version of theForeclosure Prevention Act of 2008 (S. 2636).

Specifically, the amendment would help more than 600,000 financially-troubled families keep their homes by eliminating a provision of bankruptcy law that prohibits modifications to mortgages on the debtor's principal residence for eligible homeowners. Homeowners would be required to pass a means test to verify their inability to pay off the current mortgage and only nontraditional and subprime mortgages already originated as of the date of enactment would be eligible for modification. Judges would be allowed to reduce interest rates to the prime interest plus a reasonable premium for risk and would be prohibited from extending the life of the loan beyond 30 years. Moreover, the bill would provide that if a family sells their home within five years of the mortgage modification, the lender would receive any increase in market value up to the original loan amount. This amendment was tabled on a 58-36 vote.

•An amendment (S.A.4397) offered by Senator Murrayto increase the amount for pre-foreclosure counseling from $100 million to $200 million. 

•An amendment (S.A.4401)by Senator Sandersto place a floating interest rate cap on all loans, including mortgages, credit cards, payday loans and refund anticipation loans. 

•An amendment (S.A. 4402) by Senator Menendez to expand and improve housing counseling services by increasing financial education and counseling services available to homeowners and prospective homebuyers in financial turmoil or who seek credit or other personal financial assistance. 

•An amendment (S.A.4410) by Senator Feinsteinto create minimum national standards for the licensure of mortgage brokers and lenders. 

•An amendment (S.A. 4411) by Senator Kohl to protect homeowners in foreclosure or close to foreclosure from scam artists stealing the built-up equity in their home and leaving them without a place to live.

 •An amendment (S.A. 4412) by Senator Schumerto recycle tax-exempt debt for financing multifamily housing bonds through December 31, 2010. 

•An amendment (S.A. 4413) by Senator Schumerto recycle tax-exempt debt for multifamily housing bondswhere the initial bond issue occurred on or before December 31, 2010 and the recycling occurs on or before December 31, 2015. 

•An amendment (S.A.4414) by Senator Feingold to expand the allowable uses for the CDBG funds to include observations of neighborhoods and efforts to bring abandoned or foreclosed properties up to code through enforcement. 

•An amendment (S.A.4416) by Senator Cantwell to help facilitate the production of affordable housing by permitting individuals and corporations who are alternative minimum tax (AMT) taxpayers to utilize housing credits to reduce their AMT liability. 

•An amendment (S.A.4417) by Senator Dorgan to authorize the Federal Trade Commission (FTC) to promulgate rules with respect to subprime mortgage lending and nontraditional mortgage loans and it authorizes State attorneys general to enforce these rules.

 

Statement of Administration Policy 

The Bush Administration released a Statement of Administration Policy (SAP) in opposition to an earlier version of the Foreclosure Prevention Act of 2008 (S. 2636) on February 26. The SAP is available here.

 

Related Reading 

Congressional Budget Office, Estimated Budgetary Impact of the Substitute Amendment to H.R. 3221, The Foreclosure Prevention Act of 2008 (April 3, 2008), available here. 

CRS, Housing Issues in the 110th Congress (February 22, 2008), available here.

CRS, Understanding Mortgage Foreclosure: Recent Events, the Process, and Costs (March 26, 2008), available here. 

CRS, Mortgage Revenue Bonds: Analysis of Section 101 of the Foreclosure Prevention Act of 2008 (March 28, 2008), available here. 

CRS, The Primary Residence Exception: Legislative Proposals in the 110th Congress to Amend Section 1322(b)(2) of the Bankruptcy Code (February 29, 2008), available here. 

CRS, Understanding Mortgage Foreclosure: Recent Events, the Process, and Costs (March 26, 2008), available here. 

CRS, Modifying Mortgage Disclosure Requirements to Influence Affordability (October 3, 2007), available here. 

Democratic Policy Committee, Democrats Are Committed to Lessening the Squeeze on American Homeowners and Bolstering the American Economy (February 14, 2008), available here. 

Economic Policy Institute, Do Subprime Loans Create Subprime Cities? (February 28, 2008), available here. 

DPC