Federal Help on Foreclosures

The US Senate has been working on a second stimulus package -- S. 2636 -- The Foreclosure Prevention Act of 2008 -- to assist in the foreclosure crisis. Part of the package includes $4 billion in CDBG to states and cities to purchase and rehabilitate foreclosed properties.

The CDBG funds would be targeted to those States and cities with the highest foreclosure rates. The funds must be spent within 18 months of allocation. The funding would not be allocated through the regular CDBG formula. HUD is charged with developing a needs-based formula within 60 days of passage of the measure that takes into account the following: (1) number and percentage of home foreclosures in each State or unit of general local government; (2) number and percentage of homes financed by a sub-prime mortgage in each State or unit of general local government; and (3) number and percentage of homes in default or delinquency in each State or unit of general local government. The legislation provides HUD with the authority to grant broad waivers of CDBG program requirements (except for fair housing, nondiscrimination, labor standards, and the environment) in order to expedite the use of the funds. Grantees can assist persons at up to 120 percent of area median income.

The bill includes $200,000 in housing counseling assistance to the Neighborhood Reinvestment Corporation for foreclosure mitigation. The bill also includes a provision to raise the cap on mortgage revenue bonds by $10 billion so housing finance agencies could refinance troubled home loans. The bill also includes some reform language of the Federal Housing Administration (FHA). Separate FHA Reform legislation has been stalled in Congress due to House-Senate disagreement over loan limits and downpayment assistance requirements. S. 2636 includes compromise language that would raise the FHA loan limits from $362,000 to $550,000. The bill also includes language that requires a 3.5 percent downpayment on FHA loans.

Senator Reid (D-NV) tried to move the bill forward in late February, but lacked enough votes for passage due to a controversial bankruptcy provision that would have allowed bankruptcy judges to restructure risky home mortgages. This provision has been dropped from the bill. The bankruptcy provision is likely to be offered as an amendment by Senator Durbin (D-IL), but is not expected to pass

To garner more Republican support, the measure includes tax breaks to money-losing homebuilders. The Senate plans to move the bill by attaching it as an amendment to H.R. 3221 (a House-passed tax measure). Debate on the measure will begin today and may last through next week.