Thursday, July 24, 2008
House Approves Sweeping Effort to Help Housing is the reaction of the New York Times. Today, the House of Representatives passed a major housing bill worth…..well, that price tag has not yet been written.
The straw that broke Congress’ back was the imminent collapse of Fannie Mae and Freddie Mac, and the bill was put on the fast track. Some sell this bill as a bailout of the GSEs (government sponsored entity), but it is really much bigger than that. Billions and billions are on the table. With home values expected to fall through 2008 and foreclosure and mortgage delinquency rates at record highs, Congress moved both quickly and too hastily to pass this sweeping regulation bill.
The bill as passed in the House is:
1. An overhaul of the regulation of Fannie Mae and Freddie Mac.
This is long overdue. I argue, in Fannie Mae and Freddie Mac: Trouble doesn’t stop at $25 billion, that these two giants are grossly undercapitalized. They accrued duopoly profits (just two firms in one market) for decades (since 1968 when Fannie Mae was privatized), and the Office of Federal Housing Oversight (OFHEO) was not doing its job in regulating the two giants.
2. A permanent increase in the limit of conforming loans from $425,000 to $625,000 in some markets.
Fannie Mae and Freddie Mac, and their lower mortgage rates, were shut out of high-priced markets (a.k.a., California). Those who wanted a loan in excess of $425,000, no matter their credit rating, would be subject to a jumbo rate (usually a higher interest rate). Buyers in higher-priced markets will now be able to qualify for the low Fannie and Freddie loan rates.
I say, why have a limit at all? Spanning the years 2005-2007, Fannie Mae and Freddie Mac, and really the whole mortgage industry, was approving loans to anybody that appeared to be human. What does a limit really matter? Shoot, Roman, my cat, could have acquired a loan during that period, and he earns no income at all!
As long as the persons acquiring the loans are not subject to regulation, mortgage companies will always find a way. The incentive, profits, says that they will.
3. The Federal Housing Authority (FHA) will be able to insure up to $300 billion for homeowners in risk of foreclosure.
I would much rather see the U.S. government provide real-estate education with this money (actually, it would probably cost much less) so that home buyers are better informed when they apply for mortgages in the future. Why toss money at those who made a bad business decision in the first place?
Eventually, potential homebuyers and banks will pay attention to economic conditions. Prices will fall to levels where buyers can’t resist and banks are comfortable making the loans. No government-sponsored program will change that fact. Eventually, the housing market will rebound and the U.S. will be $300 billion further in the hole.
4. Funds summing to $3.9 billion will be allocated toward local governments to buy and rehabilitate foreclosed homes.
Tossing money into the wind…that’s what I say; I totally agree with Bush on this one. What can $3.9 billion really do? The federal government cannot simply put flowers in front of several homes in Stockton, CA and expect homebuyers to line up for a bit of the action.
If you really must spend the money, why not offer $50,000 in education scholarships for 68,000 lucky and talented American high-schoolers? At least that will provide a social benefit to the rest of the economy!
5. Roughly $15 billion in tax incentives – including a $7,500 tax break for first time buyers.
Sorry, if you bought your home last year, you don’t qualify.
6. A higher credit line extended to GSEs (a.k.a., Fannie Mae and Freddie Mac).
If Fannie Mae and Freddie Mac needed more than Congress says that the Treasury can loan, do you really think that the Treasury would say no? Enough said.
Mark my words, this bill will come back to bite us later on.
Please leave comments. Best, Nontruths