Mark Winston Griffith
A Glass Half Full: The House passes Foreclosure Prevention Measure
For the purposes of this entry, I will try to park my cynicism. I'm referring of course to my reaction to H.R. 3221, the massive American Housing Rescue and Foreclosure and Prevention Act of 2008, which recently passed the House after lumbering around the halls of Congress for months. Now that President Bush has backed off his plans to veto it, American homeowners facing foreclosure may finally be getting some care from the federal government, although none of it is particularly tender loving. A full analysis is available at DMI's Middle Class.org website.
In truth, foreclosure prevention is just of one of many moving parts in this bill. It includes a program that allows the Federal Housing Administration (FHA) to guarantee refinanced mortgages in which the lender writes down the loan amount to 85% of the borrower's loan principle. An estimated 400,000 homeowners will be assisted by this program.
The bill also provides $180 million for foreclosure prevention counseling and legal services.
But the dominant aspect of the bill of course establishes a temporary line of credit and a stock investment in Fannie Mae and Freddie in order to stabilize them, while creating a independent regulator for government-sponsored entities (GSEs). Other features include raising loan limits of GSE loans; minimum standards for mortgage licensing and a registration system for brokers; $4 billion in Community Development Block Grant (CDBG) funds to help cities and states acquire and redevelop foreclosed and abandoned property; and tax credits for first-time homebuyers.
In short, there is very little that is actually wrong with the legislation. It addresses, in a limited way, affordable housing needs, as well as the effects of the foreclosure crisis on neighborhoods. It brings much needed, although perhaps not enough, reform, regulation and modernization to the administration of GSEs. And by keeping Fannie and Freddie afloat, Congress has ensured that mortgage credit doesn't completely dry up.
400,000 homeowners avoiding foreclosure is nothing to sneeze at. However, considering that the FHA guarantee program is entered into voluntarily by lenders, contains tight restrictions, and doesn't take effect until October (18 months after the crisis hit full stride), this legislation does too little for the millions of homeowners are in deep financial distress as a result of abusive mortgage underwriting. Particularly maddening is Congress's abandoning of a proposal to give bankruptcy judges the authority to demand loan modifications from lenders.
The federal government was able to act boldly and with urgency in order to come to the rescue of the capital markets – such as the Fed's line of credit to investment banks, the bailout of Bear Sterns, and stabilization of Freddie and Fannie. Unfortunately, homeowners have simply not figured as importantly in the eyes of our government.
Mark Winston Griffith: Author Bio | Other Posts
Posted at 12:42 PM, Jul 25, 2008 in Economic Opportunity
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Comments
Not to be picky or too negative, but the CBO estimates that of the 400,000 homeowners that may be helped by the voluntary FHA program, about 140,000 will face a second foreclosure (since banks have an incentive to put their worst performing loans in), so in the end, the bill will only help about 260,000 homeowners. We expect to see about 2.5 million foreclosures this year. It seems that even after President Bush signs this bill into law, there will be a lot more work to be done!
Posted by: Liz | July 29, 2008 02:56 PM
You're absolutely right, Liz. Much more work needs to be done. And I'm glad you cited the 2.5 million foreclosures, a number I've used in past entries to give an idea of the scale of the problem.
Posted by: Mark Winston Griffith | July 30, 2008 01:19 PM
Did I miss something or isn't this program voluntary for banks? Why would they write down loans now as opposed to before the legislation. There is no incentive.
Posted by: an idiot | July 30, 2008 11:21 PM
Granting judges the right to rewrite contracts agreed to by two parties seems entirely too risky. Congress was right to abandon the idea because contracts would otherwise be meaningless in this country. Rule of law would give way to judges being the final decider of what are the terms. As for the rest of the bill, it seems like a handout to Fannie and Freddie at tax payers expense. What are we talking about 2% of all mortgages in default? That means that 98% of borrowers are making their payments on time.
Posted by: Joseph Janos | August 7, 2008 07:09 AM
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Posted by: sherin | August 11, 2008 08:10 AM
I think banks will accept the FHA proposal because it could be risky not to; it costs banks on an average, 50k to foreclose. Unless those risky investors want to...never mind!
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