As of this writing, the Senate Banking Committee seems to be nearing a consensus on its housing rescue plan aimed at preventing foreclosures on homes that are covered by troubled mortgages. In an election year, and with foreclosure filings 65-percent higher in April from a year ago, it is to be expected that lawmakers should be scrambling to show some effort in responding to the foreclosure crisis. Last week, the House of Representatives passed a measure under the stewardship of Congressman Barney Frank (D-Mass.) that is similar to the Senate Banking Committee’s plan.
Under the committee’s plan, a $300-billion fund would be created that will enable the Federal Housing Administration (FHA) to insure refinanced mortgages after lenders agree to forgive part of the loan. Thus, lenders will take some loss, and homeowners will obtain a loan at more reasonable terms — a loan that they can service without facing a hardship. This plan is expected to help 500,000 homeowners prevent foreclosures in the next five years. Sen. Christopher Dodd (D-Conn.) has described the plan as the “last best chance” for Congress to address the foreclosure crisis this year.
Only some types of mortgages are eligible for this plan. One good feature is that it excludes speculators from the rescue — only owner-occupants will be covered. The half-million homeowners the plan is meant to help are only a fraction of some 2 million who will face foreclosure this year alone. As with housing programs everywhere, expect to see creaming, as the safest mortgages get rescued first. It is already known that homes that have a second lien on them (such as the many 80/20 loans) will not be covered by this housing rescue plan.
While it is not clear what is holding up finalization of the plan in the Banking Committee, we know that the source of funding for the has been a contentious issue. Earlier, Sen. Dodd was in favor of using taxpayer money, there were Republican senators who wanted the government-sponsored enterprises, Fannie Mae and Freddie Mac, to create a federal mortgage-insurance fund for the FHA to use to purchase troubled mortgages. Sen. Shelby (R-Ala.), it is reported, has objected to any taxpayer subsidy.
Some sources reported that late on Thursday (May 15) that Senators Dodd and Shelby reached a deal under which Fannie Mae and Freddie Mac would direct money from a new affordable housing fund to backstop the mortgage insurance fund. It is not clear now if this deal is indeed final. Fannie Mae and Freddie Mac contribute to this affordable housing fund. It is proposed that in the first year, 100 percent of this fund would go to the new FHA program; in the second year, 75 percent; and in the third year, 50 percent.
Unfortunately, it is a zero-sum game with the affordable housing fund. This fund was created to provide support from the mortgage giants Fannie Mae and Freddie Mac for affordable housing throughout the nation — for affordable rental housing as well as owner-occupied housing. The fund is also intended for use in historically underserved geographic areas and to help historically underserved population groups. If 100 percent of the funds are used to help out a subset of homeowners facing foreclosures, this means that there will be no funds to assist affordable rental housing and for other homeowners or prospective homeowners. It is necessary to carefully examine the charter obligations of Fannie Mae and Freddie Mac, and to ensure that they do fulfill a meaningful role in promoting affordable housing and serving historically underserved groups and areas.
There are companies in the private sector that are already in the business of purchasing troubled home mortgages at a deep discount, and then selling the property for a profit. PennyMac is one major player in this area.
The question is why lenders would sell their mortgages to the FHA and not to private companies.
The answer can only be that they get a higher price from the FHA. This implies that there is an element of government bailout of lenders here. The Housing Rescue Plan, in all likelihood, will offer a better deal to lenders than they get with only the private operators in the business. The higher price that FHA will pay will, in effect, be a government bailout. Another case of the government being an unwise buyer — buying goods way above the free-market price!
The housing rescue plan is expected to stabilize housing prices. Preventing more homes from foreclosing and appearing on the market for sale will achieve this goal to an extent. But a direct incentive for homebuyers would be more effective in preventing a sliding down of home prices.
Senators Dodd and Shelby also seem to have agreed on creating a new regulator for Fannie Mae and Freddie Mac. Events over the past few years have shown that a weak regulator is in the end not in the interest of even Fannie Mae and Freddie Mac, the companies being regulated; and a weak regulator has never been in the interest of the American people.
Once a consensus is reached in the committee, the next step would be for this plan to be taken to the Senate floor for approval. But this could take a while, because Senate leaders are not yet on board.
The White House has threatened to veto a similar housing package that was passed last week by the House of Representatives. President Bush has said that he will veto any bill that involves a cost to taxpayers.
Some pundits, however, are confident that this housing rescue plan will pass in the Senate and will not be vetoed by the president.
Many hope that there will be enough compromise features in the bill, with language emphasizing that the plan is in effect “self-funded,” which just might make it acceptable to the president.