Just as the boat that Freddie Mac and Fannie Mae have been vacationing on prepares to sink due to tropical storm “Subprime”, the government comes to the rescue! President Bush has recently signed the initiative to pass sweeping legislation that will offer up to $300 billion in assistance to troubled homeowners and throw government support behind mortgage finance giants Fannie Mae and Freddie Mac.

Here is a summary of the provisions of the bill:

1. HELP FOR FANNIE AND FREDDIE: This bill will allow the Treasury to offer Fannie and Freddie an unlimited line of credit over the next 18 months and the authority to buy stock in the companies if necessary. However, there are also some concerns with this provision as the Congressional Budget Office has estimated the potential cost of this “rescue operation” could be $25 billion.

2. HELP FOR HOMEOWNERS THROUGH THE FEDERAL HOUSING ADMINISTRATION: The FHA will be allowed to insure up to $300 billion in new 30-year fixed rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down their loan balances to 90% of the current appraised value of their homes. Lenders would also agree to pay upfront fees to the FHA equal to 3% of a home’s appraised value. Borrowers must agree to pay an annual premium to the FHA equal to 1.5% of their new loan balance and they must also agree to share with the government any profit they realize from selling or refinancing their home.

3. CONFORMING LOAN LIMITS WILL BE INCREASED: The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,000 from $417,000. The FHA maximum loan limits for high-cost areas would also increase to $625,000.

4. FIRST TIME HOME BUYER TAX CREDIT: The bill will include a tax refund for first-time home buyers worth up to 10% of a home’s purchase price but no more than $7,500. The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments by the buyer. The refund would be reduced gradually for single filers with adjusted gross incomes above $75,000; and for joint filers with AGIs over $150,000.

All of the provisions in the new bill will go into effect no later than October 1, 2008 with some measures occurring sooner.

The government has been working to encourage lenders to forgive debt so homeowners can refinance their loans for lesser amounts and remain in their houses, however, lenders have been reluctant to forgive the debt. The FHA-refinance plan is another way of encouraging debt forgiveness. Among the sticking points: Many homeowners have home equity lines of credit or home equity loans. In most cases, these lenders will lose that entire loan balance under the FHA-refinance plan. The new law is low on specifics, but it gives the FHA permission to give second lien holders a cut of the home price appreciation proceeds that the FHA collects.

Hopefully, this 300 billion dollar lifejacket will float, and help many troubled homeowners with their debt and credit troubles.

Does anyone have any opinions, positive or negative regarding this latest legislation?

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