Foreclosure relief: Another bailout for bad behavior?

One good bailout deserves another. Or does it?

The Federal Reserve's extraordinary rescue of the foundering Wall Street investment bank Bear Stearns inspired the Senate this week to move toward passing legislation aimed at helping the opposite end of the housing debacle: homeowners facing foreclosure and a housing industry hoping to regain some measure of traction.

But the bill, which could pass the Senate as early as next week, was broadly criticized as not living up to its name. The "Foreclosure Prevention Act" would put some small change in the pockets of ordinary people. But most of the benefit would flow in tax breaks to some of the same companies that caused the problem in the first place.

"Those who stand to benefit most are homebuilders and businesses hit by the economic downturn," the Washington Post reported."Through 2010, the entire tax package would cost about $28.8 billion, of which $25.5 billion would go to money-losing businesses in the form of tax rebates." (Those businesses would give up other tax breaks to reduce the cost of the entire bill to $15 billion by 2018.)

"Anybody who gets money in their hands out of this bill will be happy, but that does not mean it will solve the larger social problem or larger economic problem," said Peter Morici, a University of Maryland economics professor quoted by the Post.

Indeed, the bill offers a relatively modest menu considering the scope of the problem. A new property tax deduction of $1,000 for couples and $500 for individuals would help tax filers who do not itemize deductions. Tax-exempt bonds worth $10 billion would go to local housing agencies to refinance subprime loans and provide new first-time mortgages. Grants worth $4 billion would be offered to local governments for buying foreclosed properties. And $100 million would expand counseling for homeowners at risk of defaulting on their loans.

The bill also gives a tax credit to anyone who buys a foreclosed home. And it provides the aforementioned tax breaks for builders and their lending partners, allowing them to write off current losses on taxes paid in previous, more profitable years.

Stricken from the bill was a provision favored by many Democrats allowing bankruptcy judges to ease mortgage payment terms for distressed borrowers.

Altogether, the package would cost taxpayers an estimated $15 billion. By contrast, the cost of taking on the bad housing debt accumulated by Bear Stearns carried a cost of $29 billion.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Sen. Richard Shelby, R-Ala., the ranking Republican, emphasized that this effort is a modest first step in trying to boost Main Street business and help ordinary Americans. Indeed, the fact that Republicans seemed eager for government to intervene in the economy and to emphasize the bipartisan nature of the effort was taken by many as an indication of the situation's severity.

Revisions expected
Still, the bill was heavily criticized, and House leaders vowed to make major changes.

A Washington Post editorial called portions of the bill an "awful idea."
Who would benefit most? "A good guess is the folks who made money hand over fist during the housing bubble but have been losing money at the same rate since the subprime mortgage market collapsed last year: the home construction industry and Wall Street firms such as Merrill Lynch and Citigroup. In other words, this provision is a large, unwarranted bailout for the very industries that helped send the U.S. economy on its scary roller-coaster ride in the first place."

Aaron Katsman of Bloggingstocks.com complained about the local government provision. "So the Senate decided that local governments should get $4 billion to get into the real estate 'flipping' market."

House Speaker Nancy Pelosi also criticized the tax breaks for builders and the enticements for speculators to buy up low-cost houses with government help. "Hopefully the balance will swing to be more in favor of those families who are in danger of losing their homes," she said.

The House expects to launch a more aggressive approach next week. Rep. Barney Frank, chairman of the Financial Services Committee, will open hearings on a bill to provide $300 billion in federally guaranteed loans to help refinance the mortgages of as many as 1.5 million homeowners at risk of default.

Frank's proposal, according to The New York Times, would require lenders to take losses by cutting the principle balance on troubled loans. The hope is to avoid further foreclosures on a massive scale.

More rewards for bad behavior?
The problem with all of this intervention — whether it's government help for lenders, builders or at-risk homeowners — is that it seems to reward the very behavior that caused the problem. Somehow the lesson seems lost on smug investment bankers, greedy lenders, free-wheeling builders, speculators and people who shouldn't have qualified as homebuyers.

At the same time, these bailouts are a slap in the face to those who have been diligent stewards. Their taxes will now pay for the foolishness of others, says Washington Post columnist Robert Samuelson, who worries that the various aid packages offer a cure worse than the disease.

People who made large down payments or kept their monthly payments at manageable levels would be made relatively worse off, he wrote. Government in this case "punishes prudence and rewards irresponsibility."

Helping the irresponsible was also a theme at a Senate Banking Committee session with Federal Reserve officials on Thursday. Federal Reserve Chairman Ben Bernanke and others were hauled into explain why and how the Fed arranged to take over Bear Stearns' real estate portfolio at taxpayers' expense while dumping the rest of the troubled company into the arms of JPMorgan Chase.

It was not a bailout of Wall Street, they insisted, but a desperate act to shield the overall economy from a destructive financial implosion that would have left virtually no one untouched. That was their answer as described by Toronto's Globe and Mail.

"The benefit of our action is not Bear Stearns, or even Wall Street. It's Main Street," Bernanke said.

New York's Federal Reserve President Timothy Geithner, who brokered the deal, was more explicit. A collapse would have meant "lower incomes for working families, higher borrowing costs for housing, education and the expenses of everyday life, lower value of retirement savings and rising unemployment."

Also disclosed Thursday was the extent to which the Fed has been lending money to Wall Street investment firms under a new program.

The borrowing averaged $38.1 billion last week and $32.9 billion the week before, compared to $13.4 billion in the first week that the Fed opened its credit window to investment firms.

The program began on March 17 as part of the Fed's effort to help the financial system. The big Wall Street firms will be allowed to get emergency loans directly from the central bank over the next six months. The practice is patterned after a similar service available to commercial banks. It is the broadest use of the Fed's lending authority since the 1930s.

Steve Berg, a former Washington Bureau reporter, national correspondent and editorial writer for the Star Tribune, reports on urban design, transportation and national politics. He can be reached at sberg [at] minnpost [dot] com.