What is the Foreclosure Prevention Act of 2008

The Foreclosure Prevention Act of 2008 is legislation designed to stabilize the housing market following the subprime crisis of 2008. It focused on assisting homeowners in danger of foreclosure.

BREAKING DOWN Foreclosure Prevention Act of 2008

The Foreclosure Prevention Act of 2008 included a range of measures intended to stabilize the housing market after the rise in mortgage defaults and foreclosures following the financial crisis. The law encouraged the use of qualified mortgage bond proceeds to refinance qualified subprime mortgages, offered tax credits for low-income households and first-time home buyers, and raised caps on some state housing bonds to make it easier to finance rental properties and affordable housing projects. Congress passed the act on July 26, 2008, and President George W. Bush signed it into law on July 30, 2008.

In practice, the law functioned more as a way to treat the symptoms of the subprime crisis than as a way to treat the cause, though it did amend the Truth in Lending Act in an attempt to beef up disclosure requirements for lenders. The act's primary goals involved increasing support for families in danger of losing their homes, as well as stabilizing and supporting the housing market more generally.

Other Elements of the Foreclosure Prevention Act of 2008

The act's other main components included rules allowing homeowners with regular income and underwater mortgages to modify their loan agreements under certain conditions and gave bankruptcy courts greater discretion in the handling of cases involving individual debtors. The legislation also established a temporary tax credit equal to 10 percent of a home's purchase price, with a $7,500 cap, to be paid back in equal installments over 15 years.

Bailing Out Fannie Mae and Freddie Mac

Additional stabilization of housing markets came from the passage of the Housing and Economic Recovery Act of 2008, which, among many other things, authorized the Treasury Department to bail out Fannie Mae and Freddie Mac. Entering 2008, the two entities remained private corporations guaranteed by government funds, but both had been gravely wounded by subprime mortgage holdings that turned toxic during the crisis. Federal regulators unwisely allowed the two agencies to guarantee increasingly large amounts of subprime mortgage debt in an effort to stabilize the deteriorating markets. In a last-ditch attempt to keep from nationalizing the companies, the Treasury Department guaranteed up to $25 billion in subprime mortgages held at Fannie and Freddie, which did little to reassure skittish investors. The organizations' stocks tanked, eventually forcing Treasury Secretary Henry Paulson to nationalize the institutions. This move led to further bank bailouts after wiping out $36 billion of Fannie and Freedie's preferred stock.