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Mon, Jul 28, 2008 - Page 10 News List

US legislation benefits lenders

STABILIZER The bill, which guarantees new loans for 400,000 homeowners, sped to approval after lawmakers added a plan to help support Fannie Mae and Freddie Mac


Bank of America Corp, JPMorgan Chase & Co and US lenders may sign up customers backed by the government and shed bad home loans after the US Congress passed legislation to prop up Fannie Mae and Freddie Mac.

The bill lets the Federal Housing Administration guarantee (FHA) new loans for 400,000 homeowners after lenders reduce the unpaid balance and creates a new regulator for Fannie and Freddie, the government-sponsored companies that are the biggest providers of funding for US mortgages. US President George W. Bush will sign the legislation as early as this week, a spokesman said.

“We would expect to see an increase in the number of home buyers who are seeking FHA financing to purchase a home and that will be a benefit to us,” said Dan Frahm, a spokesman for Bank of America, which became the biggest mortgage lender after acquiring Countrywide Financial Corp this month.

The bank is the leading provider of FHA loans, he said.

The legislation, which passed the Senate 72-13 on Friday and the House of Representatives 272-152 on Wednesday, is Congress’ broadest response to plunging home prices, a more than doubling of foreclosures in the second quarter and market turmoil that led to the collapse of Bear Stearns Cos in March and the seizure of IndyMac Bancorp Inc on July 11.

Bankers and their lobbyists generally back the measure and say a tax credit for first-time buyers will create new borrowers, helping to trim an oversupply of available homes and slow the drop in home prices. The FHA program will let them cut the number of bad loans on their books and held by investors.

The legislation, unveiled in March, sped to approval after lawmakers added a plan proposed on July 13 by US Treasury Secretary Henry Paulson that lets him back up Fannie and Freddie. The Treasury could now buy shares of the companies, which own or back half of the US$12 billion in US mortgages. The change prompted Bush to drop a veto threat.

The bill creates a regulator for the two companies with the power to raise capital standards and restrict asset growth and executive pay. The measure gives the Federal Reserve a consultative role in overseeing their capital.

The centerpiece is a three-year FHA program that lets banks shift loans unlikely to be repaid to the government, after they agree to cut the mortgage principal. The Congressional Budget Office estimated in May that the program would cost US$1.7 billion and cover about 500,000 loans over five years.

“The enhanced role of the FHA should bring stability to many communities that have been particularly hard-hit by the subprime crisis,” said William Donovan, a partner at Venable LLP in Washington, who specializes in legislation affecting financial institutions.

The measure provides US$180 million for foreclosure-prevention counseling and US$4 billion to communities to buy and rehabilitate foreclosed homes. It raises Fannie Mae and Freddie Mac’s loan limit to US$625,500 from US$417,000 in high-cost areas.

JPMorgan Chase, which services about US$775 billion in mortgages, will probably tap the program since it will let investors shed deteriorating loans, spokesman Tom Kelly said.

“Before, you could cut the balance, but the investor is still holding this loan,” he said. “This moves the asset, locks in a price for the investor and allows them to move on.”

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