Housing Rescue Package Will Have Global Impact

A full one year after the credit crisis began, Congress is in the final stages of approving HR 3221, the most comprehensive mortgage and housing legislation in decades. “This will have an enormous impact in the US housing and mortgage markets, as well as every major financial market all across the world,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers.

Impact on US Housing and Mortgage Markets
Licensing of all mortgage originators – “The great thing about this legislation, compared to other proposals that came before it, is that both bankers and brokers will be required to adhere to the same standards,” said Nicholas. The legislation calls for background checks, testing, registration in a national database and annual continuing education requirements for all individual bankers and brokers.

Stabilization of Fannie Mae and Freddie Mac – The new legislation empowers the government to provide funding to Fannie and Freddie if they are unable to raise funds on the open market, effectively guaranteeing their survival and ability to fund loans. Without this legislation, home prices could have collapsed even further due to the lack of funding options for buyers in the marketplace. “This is great news for home buyers and sellers because it eliminates the risk that home buyers will suddenly find themselves out of financing options,” said Nicholas. Approx. 68% of all new mortgages originated in 2008 were purchased by Fannie Mae and Freddie Mac. Additionally, the legislation extends higher loan limits in high cost areas indefinitely, albeit with maximum loan sizes of $625,500 compared to the current limit of $729,750 that is set to expire at the end of 2008.

Loan Modifications – Mortgage servicers are given new authorities and legal protections to modify the loans they service. Over 60% of US home mortgages are securitized. This means that the company collecting your payment (known as the mortgage servicer) doesn’t really own the mortgage note – it is owned by a group of Wall Street investors. “Prior to this legislation, mortgage servicers lacked authority and faced enormous legal liability from their Wall Street investors whenever they modified a mortgage,” said Nicholas. Under the new law, servicers are protected from liability so long as they take steps to ensure that the modified loan terms will net their investors the same or better result than requiring the borrower to go all the way through the foreclosure process. “This should help more borrowers keep their homes through the loan modification process as opposed to forcing them to lose their homes and asking the housing market to absorb another foreclosure sale,” Nicholas said.

Impact on US and International Financial Markets
Investors in the stocks and bonds of Fannie and Freddie can breathe a sigh of relief, and the financial markets have averted another cataclysmic crisis – for now. Due to the enormous size of the market for Fannie and Freddie bonds, any major downgrade in their value and credit rating has the potential to cause enormous upheaval in financial markets across the world. “Every time the value of their investments fall, financial institutions need to raise more money to maintain their minimum capital requirements,” said Nicholas. “This pressure to raise funds and meet capital requirements creates a downward spiral in prices forcing financial institutions to continually sell even more assets into an already depressed market,” said Nicholas. “A bad situation quickly becomes even worse. This is exactly what has been happening among financial institutions since the credit crisis began in July 2007.”

Impact on Inflation, the US Dollar and Government Debt
While the short term impact of the legislation is a very positive development, what happens if it doesn’t work as planned? If home prices continue to decline, the government will likely be forced to spend taxpayer funds to shore up Fannie and Freddie and/or absorb the losses from the expanded FHA loan programs. The Fed may be forced to print US dollars to finance these losses and government expenditures. This would result in inflationary pressures that devalue the US dollar. Further, the legislation does not have any plan in place to break up Fannie and Freddie and completely eliminate their government ties. This means that these two financial institutions will retain their privileged status as “too big to fail” which could require another government bail-out at some point in the future.

Members of the press can learn more about the Housing Rescue Package, Fannie Mae, Freddie Mac and other current events in the mortgage industry by attending the upcoming CMPS event in New York City, July 28-30, 2008. The main presenter will be CMPS Institute Chairman Gibran Nicholas, and there will be a special real estate market forecast delivered by Dr. Lawrence Yun, chief economist of the National Association of Realtors. The entire event is open to the press, who can request complimentary attendance by registering here: http://www.cmpsinstitute.org/public/forecast


About CMPS Institute: CMPS is a training, examination, certification and ongoing membership program for financial professionals who provide mortgage and real estate equity advice. Recognized for its preeminence within the industry, the CMPS curriculum represents the core knowledge expected of residential mortgage advisors regardless of the diversity of specializations within the industry. Over 5,500 financial professionals have gone through the program since its launch in 2005. For more information or to find a certified professional near you, please visit www.CMPSInstitute.org or call 888.608.9800.