Friday, August 22, 2008

The Impact of the Major New Federal Housing Law on Your Bankruptcy Practice

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

One of the biggest stories from Congress late last month was its passage, and President Bush’s signing (contrary to his earlier veto threats), of the Housing and Economic Recovery Act of 2008. The Act includes no changes to the Bankruptcy Code, in case you haven’t already assured yourself of this.

But this Act still has potentially significant, albeit speculative, consequences for the bankruptcy and debtor/creditor world. Putting aside the likely only tangentially relevant potential tax credits for limited first-time home buyers, the major shoring up and regulation of Fannie Mae & Freddie Mac, and a variety of other sections of the 600+ page Act, the most directly relevant is the $300 billion expansion of the FHA’s authority to refinance troubled mortgages. This program is completely voluntary for lenders, but Congress estimates that about 400,000 homeowners will be helped through this program, which starts October 1, 2008. Given the millions of distressed properties in California and the Southwest, in Florida, and in the "Rust-belt," one wonders how relatively few will be helped here in Oregon and the Northwest.

The practical question for attorneys with clients facing foreclosure is who qualifies for this program. To advise homeowners of their options appropriately, an attorney needs to determine if this new tool is worth pursuing. If a homeowner clearly does not qualify, then the attorney can rest assured that this option has been sufficiently investigated.

Only owner-occupants are served by this new program, and only those who can establish (through IRS records and a mortgage debt-to-income ratio of greater than 31% as of March 1, 2008) that they are unable to afford their mortgage payments. The new loans will be for the lesser of 1) 90% of the home value and 2) the debtors’ ability to repay the new 30-year fixed-rate loans, based on current FHA affordability standards.

But likely the one simple factor that will disqualify a large portion of the homeowners who seek legal advice is that no subordinate liens can exist on the property. So any such subordinate liens must release their liens either voluntarily or for partial compensation, perhaps from the primary lien holder. Given the loss this lien holder is already taking, is appears that only in rare circumstances would the existence of any significant subordinate liens not disqualify a homeowner from this program.

One last interesting detail, under this program the FHA will share 50-50 with the homeowner both the new equity created by the new reduced loan on the property, as well as in any future appreciation, payable upon sale of the property or payoff of the FHA loan by future refinancing

Helpful LINKS for more information on this story:
1) About two pages of answers to 10 questions in a FAQ’s format, from the U.S. Department of Housing and Urban Development (HUD):
2) A somewhat more detailed 4-page Summary of the Housing and Economic Recovery Act prepared for the public by the U.S. Senate’s Committee on Banking, Housing & Urban Affairs.
3) And for gluttons for absolute detail, all 636 pages of the Act (Pub.L. 110-389, H.R. 3221) are available at:

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,