U.S. senators have deal on housing rescue bill
Posted on May 20th, 2008 by beetlbumjl Categories and Tags: Uncategorized, Alabama, bailout, banking, bureaucracy, CAD, Christopher Dodd, debt, economics, Fannie Mae, federal government, Federal Housing Administration, finance, Freddie Mac, google news search, mortgage, politics, Richard Shelby, self-funding government agency, U.S. Senate Banking Committee, United States, Washington, your moneyGood news on the AP wire from DC (emphasis added):
WASHINGTON, May 19 (Reuters) - Leaders of the U.S. Senate Banking Committee said on Monday they had reached a deal on legislation to create a multibillion dollar mortgage rescue fund and a new regulator for housing finance companies Fannie Mae and Freddie Mac.
The plan would enable the Federal Housing Administration to guarantee billions of dollars in refinanced mortgages for homeowners whose properties have fallen in value since they took out their loan.
“The bill addresses the root of our current economic problems — the foreclosure crisis — by creating a voluntary initiative at no estimated cost to taxpayers which will help Americans keep their homes,” Democratic Sen. Christopher Dodd, the committee’s chairman, said in a statement…
“This is a victory for the taxpayers. As far as the housing component is concerned, we’re not funding this… with taxpayers’ money,” Alabama Sen. Richard Shelby, the panel’s top Republican, said on CNBC.
A quick google news search brings up another source with even more info on the planned bill.
Top Senate Banking Committee members reached an agreement Monday on legislation that would provide new oversight to mortgage giants Fannie Mae and Freddie Mac and use the two’s assets to allow the Federal Housing Administration to insure up to $300 billion in new mortgages for struggling borrowers…
After a week of negotiating, Banking Chairman Christopher Dodd struck a deal with ranking member Richard Shelby in advance of today’s markup on the measure. The key to the agreement was tinkering with a proposal designed to provide more liquidity in the mortgage market by allowing the FHA to guarantee new 30-year, fixed-rate mortgages for at-risk subprime borrowers, providing their lenders voluntarily write down their current notes to below market value. A similar provision in a House-passed housing bill was estimated to cost $1.7 billion.
Shelby had insisted the proposal be paid for, forcing Dodd to use an offset in the bill that originally would take a portion of Fannie’s and Freddie’s new business and siphon that into an affordable-housing trust fund…
Dodd said the cost of his FHA refinancing provision should be about $500 million, which is roughly the amount that would have gone into the affordable housing fund during its first year in operation.
I’ll let bile tackle the legitimacy of GSE’s like Fannie and Freddie, but in reading these two articles, I couldn’t help but feel that our government officials have either failed math, or are simply lying. How in the world can $500 million possibly guarantee $300 billion, minus voluntary lender write downs, in subprime debt? Assuming lenders write down 1/3 of the value, 500/200000=0.25%! Even the $1.7 billion, tax-payer funded House version amounts to a tiny percentage.
So the numbers look dodgy, but according to Senators Shelby and Dodd, the taxpayer is off the hook, right? The FHA is a self-funding government agency (for now) and Fannie/Freddie are quasi-private enterprises chartered by the Federal Gov’t. But what happens if (or possibly when) the latter fall underwater themselves? When the backstops of gov’t sponsored low interest rates are over-leveraged, the market certainly isn’t confident about their worth:
Remember those quotes from Senators Shelby and Dodd in the coming months. Are they just rearranging the deck chairs until the numbers catch up? How far is the federal government and indirectly, the taxpayer, willing to bailout billions of dollars of worthless loans? Why didn’t I buy a $500,000 two story when I had the chance?
9 Responses to “U.S. senators have deal on housing rescue bill”
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May 21st, 2008 at 5:34 am
I think its fairly clear that the GSEs are unconstitutional. Far worse, as with all government agencies, the will do more harm than good. The injection of money outside of the natural flow causes boom busts. It diverts capital into areas which are not optimal. Look at all the price issues we have today. Food, school, energy, housing, healthcare. Each sector the government has heavily intervention and the costs in those sectors have risen far faster than any other. The problem with this and any other bill like it is that they are just proping up bad debt. These people should not have homes. Period. They can’t afford the payments. The prices were artificially high because of the governments bubble but giving these people a break is no different than the government going around guarenteeing loans to businesses which have failed. Its bad business and on a large scale its bad for everyone in the economy. Its a waste of resources.
Beetlbum is right about the math too. These guys are not any smarter than the average guy despite the general “well they know better” attitude many US subjects have. They don’t have the money to be doing this anyway so the whole thing is a dance with the numbers in an attempt to make it look like they are trying.
Can we please try not to use the word “subprime?” Its used to trick people into thinking these loans are something new, different and bad. Subprime is just an adjustable rate morgage and everyone knows what that is.
May 21st, 2008 at 9:29 pm
I think there is a difference between a subprime loan and one that’s adjustable. Most subprime loans (or at least portions of mortgages) are probably adjustable, but I don’t see why you couldn’t loan money to someone who’s subprime at a high fixed rate. Searching for "fixed rate subprime" returns some hits verifying its existence anyway. Subprime loans have existed for long time, but the criteria to get one has weakened only recently. Exhibit A (though he committed fraud and might not have been subprime, let’s all laugh at him still.)
May 22nd, 2008 at 7:19 am
There is a difference. I should have been more specific. I meant in this housing bubble subprime meltdown "subprime". According to Wikipedia: In the third quarter of 2007, subprime ARMs only represented 6.8% of the mortgages outstanding in the US, yet they represented 43.0% of the foreclosures started. Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.
They always talk in the media about raising monthly payments as the reason for the problem and those obviously are ARM.
May 22nd, 2008 at 8:43 am
I’m a bit ignorant on what all happened during this "crisis". I understand these people got ARMs but people have gotten ARMs before without any problem. What was the economic trigger to cause these people’s rates to go up so high that they had to choose foreclosure? Was this mainly tied to inflation?
May 22nd, 2008 at 8:51 am
Good point. In many cases people either didn’t know what they were getting or were consciously playing hot potato hoping to unload the house before the bomb went off. Time is up and I have little faith that bills like this won’t eventually pull the taxpayer at large into this mess.
May 22nd, 2008 at 9:45 am
This is an extremely long winded explanation I found last night, but if you bear with it and ignore the editorializing, I think it’s pretty decent.
May 22nd, 2008 at 2:08 pm
Give me a break. As if these people who use those services don’t understand what they are getting into. The reason a payday lender exists is because people need to be able to get cash quick. It’s their own inability to live within their means that causes the demand for them. They aren’t vulnerable just bad with money.
Anyway… the guy speaks nothing of government interference. For that look here, here, and more generally here.
May 23rd, 2008 at 7:06 am
I like your second link bile. On the subject of gov’t created bubbles, do you think the latest round of rate cuts are responsible for excess money sloshing around and finding its way into the oil/food/commodities run up?
May 23rd, 2008 at 7:18 am
It’s hard to say where the money is going exactly but very likely food and obviously Wall Street. You can see the volatility of the market in all aspects. I think generally it’s safe to say, yes. Though as the money is debased people tend to invest in things with actual value so likely they’d be buying up commodities anyway. The extra money is just pushing out the timeframe in which some people will be making malinvestments.