Senate Passes Housing Bill
"From the NY Times: Congress Sends Housing Relief Bill to Bush
Here is the WSJ version: Congress Passes Housing Bill
First, I think the impact of the original part of the housing bill will be minimal. The provision allows the FHA to insure up to $300 billion in new mortgages for certain borrowers. The key is that the current lender has to voluntarily agree to write down the loan balance to 85% of the current appraised value before the FHA will insure the new loan.
The CBO (Congressional Budget Office) has estimated that the FHA will only insure $68 billion in loans for about 325,000 homeowners. The number will be limited because only certain homeowners actually qualify, and also because lenders probably will not be eager to write down loans to 85% of the current appraised value.
My biggest concerns with this provision are appraisal fraud and adverse selection.
The other major provision of the housing bill is the Paulson Plan to support Fannie and Freddie. The cost to taxpayers is very uncertain, although I doubt it will be zero (the CBO’s base case). The GSE support does appear to be almost unlimited (limited only by the debt ceiling that was increased to $10.6 trillion from $9.815 trillion).
The actual cost of the Paulson Plan is a huge concern.
CalculatedRisk’s article continued here.
Excerpt from the WSJ article:
"Policymakers hope the wide-ranging bill will help invigorate a housing market that continues to collapse and has roiled financial markets worldwide. Data released in recent weeks reveal that home sales have hit a 10-year low and home prices continue to decline around the country. Importantly, the number of homeowners facing foreclosures continues to rise, raising the specter of vacant homes and neighborhood blight.
Foreclosure-tracking firm RealtyTrac said Friday that 740,000 properties received some form of foreclosure filing in the second quarter, a 14% jump from the previous quarter and soaring 121% from the second quarter of 2007. More breathtaking: One in every 171 households received a filing in the second quarter, and all but five of the nation’s 100 largest metro areas experienced year-over-year increases.
The omnibus housing package completed Saturday attempts to deal with the housing crisis on a number of fronts. It includes $180 million for "pre-foreclosure" counseling for cash-strapped homeowners, creates an affordable housing trust fund to increase the supply of rental housing, and would raise the size of loans eligible for purchase by Fannie Mae and Freddie Mac to 115% of the local area median home price, with a nationwide ceiling of $625,000 for loans.
The centerpiece of the legislation is a program of up to $300 billion of FHA-insured mortgages to help refinance cash-strapped borrowers into affordable loans. The program would rely on lenders voluntarily writing down the value of a distressed loan for the homeowner to qualify for the new FHA-backed loan, and in return borrowers would have to share future price appreciation with the federal government. (Emphasis added)
Another excerpt, this one from the NY Times article:
"The federal intervention has certainly been bold. The nearly $29 billion loan by the Federal Reserve Bank of New York in March to orchestrate the sale of Bear Stearns to JPMorgan Chase & Company may seem small compared with the Federal Housing Administration’s authority, granted in the new legislation, to insure up to $300 billion in refinanced mortgages to help stem a tide of foreclosures.
Analysts, including the Congressional Budget Office, expect less than $100 billion of that authority to be used. The risk to taxpayers is minimal, analysts say, given higher insurance fees that will be charged to recipients of the refinanced loans.
And yet, even that $100 billion could seem small compared with the Treasury Department’s authority to spend unspecified amounts of tax dollars to rescue Fannie Mae and Freddie Mac if they are in peril of collapse.
Treasury Secretary Henry M. Paulson Jr., an architect of the rescue plan, said he expected never to use the new authority. And the Congressional Budget Office predicted that any bailout between now and Dec. 31, 2009, when the authority sunsets, would most likely cost $25 billion or less, and that there was a better-than-even chance of no cost at all.
The only real limit on the Treasury’s authority is the new $10.6 trillion debt ceiling. There is roughly a $1.1 trillion cushion between the new limit and existing federal debt of $9.5 trillion.
Critics in Congress who voted against the housing bill warned that the government was taking on too much risk, and that government aid would only reward irresponsibility by corporations and individuals.
“This bill has moral hazard written all over it,” Representative Jeff Flake, Republican of Arizona, said during the debate in the House on Wednesday. ‘We are pretending to chain a monster here, and we are, instead, letting that monster loose.’
Senator Charles E. Grassley, Republican of Iowa, voted against the bill even though he had worked on many of its tax provisions. ‘This bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street,’ he said in a statement."
