The Foreclosure Prevention Act of 2008 is currently a bill in congress aimed at helping homeowners avoid foreclosures that result from the recent problems in the home mortgage industry. As of this writing, there is a Senate version and a House of Representatives version.
To become law, one final version will have to be settled on by both houses of Congress and then be voted on. Numerous amendments have been added to both versions of the bill which may or may not change the final bill. However, both of the versions of the Foreclosure Prevention Act of 2008 contain several provisions to aid homeowners.
The passing of either bill will provide the following:
* Federal bankruptcy judges would be allowed to renegotiate the terms of mortgages that are about to go into foreclosure. This would allow homeowners to keep their homes and avoid foreclosure.
* Additional funding would be provided to allow the issuing of more tax-exempt mortgage revenue bonds. These bonds would be used for refinancing sub-prime mortgages and aid in the prevention of foreclosure.
* Provide funding for the creation of community development boards that will repair foreclosed homes. This is designed to speed the sale of foreclosed homes and thereby reduce the total number of foreclosed homes on the market.
* Give a $7,000.00 tax credit to people who purchase foreclosed homes. This provision is also aimed at reducing the total number of foreclosed homes on the market.
Bankruptcy Laws
The changes to the bankruptcy laws and the proposed tax credit are generating the most debate about the Foreclosure Prevention Act of 2008. Critics argue that these provisions could actually harm the homeowner and possibly prolong the mortgage situation.
Under current bankruptcy laws, a judge may not alter the terms of a mortgage on a person’s principal residence. The bill would allow judges to change the interest on a mortgage to the rate charged by the Federal Reserve Board plus a reasonable addition for extra risk to the lender.
Critics argue that this is merely a bailout for lenders without providing much relief for homeowners. They also feel that this part of the bill would devalue existing contracts and might well reduce the amount of mortgage credit available. This in turn could actually extend the time required for a housing market recovery.
Tax Credit
Critics of the tax credit argue that it distorts the true market value of a home. A foreclosed home, with a $7,000.00 tax credit attached, would now become more valuable than a home of identical value that is owned by a person who is current with their mortgage. They also feel that this tax credit might encourage some lenders to accelerate the foreclosure process and hesitate to negotiate with homeowners in financial difficulty.
Conclusion
At first reading, the Foreclosure Prevention Act of 2008 appears to be well intended and to have some provisions that could provide some real relief for beleaguered homeowners. However, critics of the bill raise some very real concerns about some provisions. These items need to be addressed. If this is done properly, the final law could speed the recovery of the home mortgage industry and prevent a large number of foreclosures.
Steve studies real estate and investment topics. He specializes in current economic affairs. Learn more about foreclosures and real estate investing at the Real Estate 4 Pennies blog.
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