Foreclosure Legislation Update

On Wednesday, a House committee approved $15 billion in loans and grants for local governments to buy foreclosed homes.

The House Financial Services Committee voted 38-26 to approve the bill that is part of a larger package being pushed by House Democrats. Also, on Wednesday the committee passed legislation that would provide lenders with legal protection if they work with homeowners facing foreclosure.

House Republicans opposed the bill and argued that using federal funds to buy foreclosed homes could encourage foreclosure in the long run.

Representative Spencer Bachus (Republican, Alabama) said, “I don’t think we ought to be incentivizing foreclosure.”

Other members argue that certain provisions in the bill (such as making it mandatory for homes to be 60 days into the foreclosure process before they can be purchased) would prevent abuse. Supporters also claim that Congress must do more to help local governments deal with loss of taxes and maintenance of foreclosed homes.

Committee Chairman Barney Frank (Democrat, Massachusetts) said, “Cities are being badly hurt and this is the only vehicle proposed that goes to the aid of the cities and counties.”

The $15 billion will be divided up into $7.5 billion in loans and an equal share in grants. It will be distributed to the states based on foreclosure rate, home prices, and other factors.

Non-profit organizations and Government institutions would be eligible for the funding also. They could use the funds towards the purchase, rehabilitation, or resale of the respective properties.

$3.75 billion of the grant money will be dedicated to providing housing for low-income residents.

Republicans counter that the legislations is too costly and will add to the growing federal deficit.

Mr. Bachus said, “Putting aside the issue of how a large new federal program with a price tag of approximately $15 billion would be paid for, the bill’s ultimate beneficiaries are likely to the lenders, investors and speculators who own the vacant or foreclosed properties.”

However, the bill does allow the government to be repaid on zero-interest, non-recourse loans. Loans for homeownership would be repaid in 2 years while loans dedicated to providing rentals would be repaid in 5 years. Also, the government is entitled to 20% of any appreciation of the property.
The committee rejected a proposal by Republicans to make all of the $15 billions loans, and a measure requiring all states to match all funds received by the government.