HERA: The Good, The Bad and The Ugly

By Fredric J. Gooch
General Counsel, DocuTech Corporation

Despite threats to veto, on July 30, 2008, President Bush signed the "Housing and Economic Recovery Act of 2008" (HERA), a bill that many have described as the most significant piece of housing legislation passed in the last thirty years. Many of these legislative changes have been proposed, debated and postponed for several years, but it has taken a dramatic downturn in the mortgage industry to get politicians serious enough about housing issues to pass a bill. The law has many different components and will have far reaching effects throughout the industry. Here is a list of the various topics addressed:

• Increase in loan limits for GSEs, FHA and VA permanently.
• Increase in regulation of Fannie and Freddie.
• Establishes new powers to stabilize the GSEs in a crisis.
• Creates a fund to facilitate affordable housing.
• Establishes "Hope for Homeowners Program" to prevent foreclosures.
• Encourages nationwide licensing system for loan originators.
• FHA Modernization
• Extends foreclosure stays for active service members.
• Provides four billion dollars for redevelopment of foreclosed and abandoned homes.
• Expands funding for foreclosure mitigation activities and counseling.
• Adds new disclosure requirements to the Truth-in-Lending Act.
• Provides home improvement benefits for disabled veterans.
• Reduces regulatory burden for public housing authorities.
• Establishes tax incentives for first time homebuyers.
• Loosens restrictions on real estate investment trusts.
• Federal debt limit increased to $10.615 trillion.

A complete discussion of the bill would take volumes considering its immense length and coverage; however, I would like to review some of the most important issues for mortgage lenders. I think it is appropriate to label them as the good the bad and the ugly.

The Good

GSE Reform - these changes have been discussed ad nauseam over the last several years and their time has finally come to fruition. The higher loan limits will help the GSEs become more relevant in areas of the country where they were out priced. The new law sets the single family, one-unit loan limit at the greater of $417,000 or 115% of the local area median home price as determined by HUD. This will allow the GSEs to expand into higher priced mortgages and rapidly adapt to changing market conditions. The GSEs will finally get a new regulator with more authority and supervisory jurisdiction. The law creates the Federal Housing Finance Agency (FHFA) as the new regulatory for the GSEs. The GSE’s will now only have to deal with a single regulatory except with respect to fair housing issues. This will allow them to operate more efficiently and will provide them with better oversight moving forward.

Hope for Homeowners - The law establishes the new program "Hope for Homeowners" under the auspices of the FHA. The program allows borrowers who meet certain conditions to refinance into FHA loans if the lenders agree to a reduction in the principal amount of the loan.

The Bad

FHA Downpayment - The FHA Downpayment requirement has been raised to 3.5 percent. This increased restriction is designed to prevent future delinquencies and foreclosures; however, it certainly will serve as a barrier to first time homebuyers in expensive areas of the country who would like to utilize FHA loan programs.

Seller Assisted Downpayment - Seller funded Downpayment will be prohibited for FHA loans. Although, other forms of downpayment assistance will still be allowed such as CDBG and HOME. Again, this provision is designed to reduce the future amount of delinquencies and foreclosures and is based on statistics suggesting such, however, this will also serve as a barrier for those who wish to purchase or sell a home utilizing FHA loan programs.

The Ugly

FHA Risk Based Premiums - The law prohibits HUD from taking any action to implement its risk-based premium program for 12 months beginning on October 18, 2008. This is ugly because many lenders and vendors have wasted a significant amount of time and energy to implement the risk-based programs which could have been utilized elsewhere. Now we have to switch back to the old static premiums for at least one year. It sure would have been nice if they could have made this determination before millions of dollars were spent in vain.

Disclosures - HERA makes adjustments to the disclosure requirements under the Truth-in-Lending Act. First , it expands the requirement for early TILA disclosures to apply to all mortgage transactions by removing the exception for "residential mortgage transactions." It also requires that lenders provide the initial TILA disclosures seven days prior to closing, and if there is a correction affecting the APR a disclosure correction must be given 3 days before closing. It requires that consumers receive their early TILA disclosures before paying any fee except for a credit report fee and adds a statement to the disclosures that states: "You are not required to complete this agreement merely because you have received these disclosures or signed a loan application." It also requires new disclosures be provided for adjustable rate mortgages that describe the product features and how the interest rate may adjust. It also requires the Secretary of HUD to make recommendations to Congress six months after reforms to RESPA to ensure that disclosure changes make the mortgage lending transaction more transparent and allow consumers to better shop for mortgage terms and settlement costs.

It certainly isn’t an ugly idea to make the mortgage transaction more transparent to the borrower through the use of simple, easy to understand disclosures. What is ugly about these changes is that more disclosures does not equate to better disclosures. It also makes the disclosure process even more difficult for lenders because they will have to give more disclosures at different time periods. The government needs to reduce and simplify disclosures so that borrowers can and will read and understand them. Different agencies creating a new hodgepodge of disclosure requirements will not get us any closer to the goal of having a well informed borrower. These disclosure requirements will not become effective until 30 months following the enactment of the law or a date determined by the Federal Reserve Board. Hopefully, there will be sufficient time to improve the process before the rules become effective.