FAQ: Treasury proposal and mortgages

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What is the Treasury asking for?
The Treasury is asking for $700 billion to buy, own and sell mortgages and mortgage-backed securities. Under the Treasury’s proposal, the Cabinet department would be able to buy these assets, sell them and use that money to buy more. The Treasury would have a two-year window to buy securities, beginning with the enactment of the law that would grant Treasury these powers.

Will I still be able to get a mortgage?
It depends upon what type of loan you want.               

Mortgages can be broken down into three types:

  • Conforming mortgages. Home loans for $417,000 or less that meet guidelines devised by Fannie Mae and Freddie Mac, the government-controlled housing finance giants. The guidelines require borrowers to have good or excellent credit histories, and to have some equity in their houses — either by making a down payment (when buying a house) or by having a house that’s worth more than the amount borrowed in a refinance.

    Mortgages are likely to remain available for qualified borrowers who get conforming loans, as long as they have sufficient equity. To qualify for conforming loans, borrowers might need to have equity of at least 5 percent or sometimes 10 percent or even 20 percent. The amount of necessary equity depends on where the home is, whether it’s a condominium and other factors (such as credit history).

    People who need to refinance, but owe more than their houses are worth, will not be helped by the powers the Treasury seeks. The Treasury’s proposal isn’t designed to bail out upside-down homeowners.

  • Jumbo mortgages. Home loans of more than the conforming limit. The jumbo limit varies, depending on location. In some places, it’s any mortgage of more than $417,000. In expensive markets such as Los Angeles , it’s a loan of more than $729,750. In some places, the limit is in between.

    Lenders say jumbo loans, when available, have high rates and fees. This is a result of the credit crunch. If the Treasury’s proposal goes through, jumbo loans might become more available and affordable. There’s no guarantee of that, though.

  • Mortgages insured by the Federal Housing Administration Loans for people who have so-so credit histories, or who have down payments of only 3 percent or so. Those loans remain available for purchasers and for refinancers who can jump through multiple qualifying hoops.

Help! I’ve fallen behind on my mortgage and I can’t get up! Is the Treasury going to help me?

The Treasury plan is a bailout for financial institutions, not for homeowners who are in danger of losing their homes in foreclosure.

However, Treasury Secretary Henry Paulson contends that the plan will help all homeowners in the long run.

“The biggest help we can give to the American people is to stabilize the financial system right now and prevent it from clogging up,” Paulson said Sunday in an interview on ABC’s “This Week With George Stephanopoulos.”

Paulson added: “We’ve been working to help homeowners for a long time. … It sure seems to me that, as we buy these mortgage-backed assets, we’ll have more leverage in working on the kinds of programs we need to work on. The key question is we want to help those homeowners who want to stay in their home and have the financial ability to stay in their home.”

So far, Paulson said, most foreclosures are from people who don’t want to stay in their homes or never could afford their homes “as a result of irresponsible lending practices.”

My house has been falling in value for more than two years. Will this action reverse that decline?
No, and it’s not designed to. In fact, the sooner house prices hit bottom, the quicker the economy will recover from this credit crisis. Some homeowners might not want values to fall farther, but lower prices eventually will make houses more affordable for first-time buyers, as well as for some homeowners who want to move up or move down.

What are the limits on the broad power that Treasury is asking for?
The secretary of the Treasury would be required to submit reports to six congressional committees, twice yearly. The Treasury would have the power to award no-bid contracts without congressional review.

Furthermore, according to the proposal: “Decisions by the Secretary pursuant to the authority of this Act are nonreviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

That means no one could sue the Treasury for causing them economic harm. This ban on lawsuits and administrative actions will affect mortgage investors more directly than it will affect homeowners.

How does the Treasury’s proposal differ from the Resolution Trust Corp., which the government set up to sell real estate after the savings-and-loan crisis of the 1980s?
The Resolution Trust Corp., or RTC:

  • Sold real estate.
  • From failed financial institutions.

The Treasury:

  • Doesn’t plan to sell real estate.
  • Its ultimate aim is to prevent financial institutions from failing.

The Treasury’s plan is an entirely different animal from the RTC. People who refer to the Treasury’s proposal as an “RTC-style” bailout are mischaracterizing the plan. You should be skeptical of what they say.

Instead of taking and selling real estate, the Treasury plans to buy and sell mortgage-backed securities and possibly mortgages themselves. The goal is to get bad mortgage-related debt off the books of financial institutions all over the world.

That, in turn, is supposed to increase the confidence that financial institutions have in one another so that they’ll lend money among themselves. The result is supposed to be a stronger global financial system that freely lends to consumers and businesses.