Lessening the Credit Crunch for Consumers

With trillions of dollars in Adjustable Rate Mortgages (ARMs) beginning to adjust, most American consumers are aware of the personal hardship and economic difficulty ahead. Many outcries for government support has fallen on deaf ears. What the media won't tell consmers is the good news. The U.S. government has taken notice and stepped in to help. Below is a summary of current actions U.S. legislative bodies are taking to mitigate the mortgage crisis.

1) Interest Rate Cuts - Option traders are anticipating the feds to cut to interest rates by 0.25% this month and expect another 0.5% reduction over the next 6 months. This will help lessen consumer payments on revolving debt such as credit cards, home equity lines of credit and auto loans.

2) Loosening of FHA guidelines - With the new FHASecure Act, delinquent homeowners qualify for an FHA-insured refi if they have:

* A history of on-time payments for at least six months before their loans reset to higher rates
* Interest rates scheduled to reset between June 2005 and December 2009
* 3 percent equity in their home, or the cash equivalent
* A sustained history of employment
* Sufficient income to make their FHA-insured mortgage payment and all other obligations

This move to help homeowners in crisis is one of the best targeted initiatives the White House has supported. On the front lines of the mortgage business, we are seeing the impact first-hand.

3) Raising FHA loan limits - Today the FHA won't insure loans above $362,790 for single-family homes, and even less in lower-cost areas. Under the bill before the House, which is expected to vote in 2007, that ceiling would increase to $417,000. This would help first time home buyers who have otherwise been priced out of the market.

4) Reducing FHA down payment - Under new reform proposals, homeowners would no longer be required to have 3 percent equity or the cash equivalent. They could get an FHA-insured loan with 0 percent down. In urban areas, lessening the down payment requirements helps revitalize neighborhoods through the sense of pride in home ownership.

5) Fannie Mae and Freddie Mac Conforming Loan size - The House Financial Services Committee plans to propose an amendment that would boost the conforming loan limit to $500,000 (currently $417,000), and give the FHA commissioner discretion to raise that limit further during mortgage crises. This is critical to lending relief in high property value states such as California and New York.

All of these actions combined could send the right signals to consumers and loosen the housing market. With home prices still bottoming, these actions may just soften the landing. More aggressive actions may be needed and may be considered if the 2007 holiday season signals that a deeper economic crisis is boiling.