A whiff of relief or a reason to wince?

Lawmakers hope a housing-relief bill will prevent more foreclosures such as this home for sale in Falls Church, Va.
REUTERS/Kevin Lamarque
Lawmakers hope a housing-relief bill will prevent more foreclosures such as this home for sale in Falls Church, Va.

“Help is on the way” may have been the headline Wednesday after House passage of a mammoth, wide-ranging housing relief bill, but it didn’t take much reading between the lines to see that a need for “confidence and stability,” not unanimous government largesse, were the operable reasons for its bipartisan support and presidential acquiescence.

With taxpayer money potentially headed for both strapped homeowners and struggling mortgage-granting giants Fannie Mae and Freddie Mac, this wasn’t anyone’s idea of ideal legislation. In fact, Republicans threatened to filibuster and President Bush signaled a veto before lending his support earlier Wednesday. Yet as it heads to the Senate for consideration, passage was pretty universally greeted as necessary.

“Critics find much to dislike about the multi-pronged plan,” CNNMoney reported. “They argue, for example, that the bill gives ‘a blank check’ to the Treasury to spend on helping Fannie and Freddie, despite assurances from Treasury Secretary Henry Paulson and Democratic leaders that the authority granted Treasury by the bill is unlikely to be used.

“Supporters note that while no one likes every provision in the bill, the housing crisis and market instability demand action. ‘This isn’t a perfect solution by any means,’ said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. But, he added, it enjoys support from a broad and unlikely coalition, including bankers, housing advocates and governors and mayors struggling with the foreclosure crisis.”

Some homeowners could refinance
BBC News described the package’s main features:

“Under the rescue plan, hundreds of thousands of homeowners trapped in mortgages they cannot afford on homes that have fallen in value would be able to refinance their mortgages with more affordable, fixed-rate loans backed by the Federal Housing Administration.

“The bill would set up the first national licensing system for mortgage brokers and other loan officers. It also includes a tax break of as much as $7,500 for first time home buyers, as well as help for troubled mortgage finance providers Fannie Mae and Freddie Mac.”

It also includes nearly $4 billion in funding to help local government entities buy up and repair foreclosed properties for resale; this is one of the provisions that earlier had caused President Bush to threaten a veto. With his change of heart, widely credited to the persuasion of Paulson, the package may well pass the Senate by week’s end.

“The positive aspects of the bill are needed now to increase confidence and stability in the housing and financial markets,” White House spokeswoman Dana Perino said Wednesday, explaining Bush’s reversal.

Swift, positive reactions

Reactions to the deal — both verbal and in the form of trading on Wall Street — were quick.

“This is about not only our housing markets, but it’s about our capital markets more broadly,” Paulson said in an interview with Bloomberg Television.

“This goes well beyond the two institutions, Fannie and Freddie; it has to do with investors in the United States and investors all over the world.”

Fannie Mae and Freddie Mac “extended their weeklong recovery after U.S. lawmakers reached a deal on legislation that authorizes Treasury Secretary Henry Paulson to bail out the mortgage-finance providers while placing few restrictions on the companies,” wrote Bryan Keogh and Dawn Kopecki at Bloomberg.com.

“Fannie Mae rose 12 percent and Freddie Mac added 11 percent in New York Stock Exchange composite trading. Their market values have more than doubled since July 15 after plummeting on concern the companies may not have enough capital to withstand the highest mortgage delinquency rates in at least three decades.”

Benefits to shareholders

Bloomberg’s report explained that “shareholders and the companies benefit because the bill doesn’t require Fannie Mae or Freddie Mac to cut or eliminate dividends if they take federal aid, giving that discretion to the Treasury. It also doesn’t automatically give the Treasury preferential treatment over other shareholders if it buys the companies’ preferred shares. The government also can’t compel the government-sponsored enterprises to issue securities or buy common stock.”

Paul Miller, an analyst with Friedman Billings Ramsey & Co., told Bloomberg the two so-called GSEs (government-sponsored enterprises) got what they wanted. “They got a big backstop and they got language that the Treasury doesn’t necessarily have to stop them from paying dividends or cap compensation. That’s why the stocks are ripping.”

As for some 400,000 at-risk homeowners who can’t afford their mortgages, Les Christie at CNNMoney.com explained how the bill will help them refinance:

“Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 40% of their gross monthly income on all household debt to be eligible for the program. They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage — and attest that they are not deliberately defaulting just to obtain lower payments.

“Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it’s to pay for necessary upkeep on the home. To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.”

“Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the website of the Department of Housing and Urban Development.”

The scope of the problem

CNNMoney’s report explained that over the past year, “housing prices have fallen more than 15% nationwide, according to the S&P/Case-Shiller Home Price Index. More than 340,000 have had their homes repossessed by banks during the first six months of the year, up 136% from the same period in 2007. The number of delinquent mortgage holders during the same period has risen to 1.4 million, up 56% from a year earlier.

” ‘Enactment of the bill is too politically important to both parties for either side to let the legislation die,’ said Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington policy research firm.”

That’s despite the wince factor, laid out by Brian Wingfield of Forbes.com:

“Here’s who the bill won’t help: taxpayers. They’re now on the hook for as much as $25 billion to rescue Fannie and Freddie, should the Treasury need to throw the mortgage buyers a lifeline, according to the Congressional Budget Office. (However, the CBO also estimates that there’s a greater than 50% chance that this won’t be necessary.) …

“The nearly 700-page bill has some awfully big-government provisions. It increases the federal debt limit by $800 billion to $10.6 trillion. It gives first-time homebuyers a tax credit of up to $7,500 (which must be paid back to Uncle Sam). It sets aside $180 million in federal grants to counsel borrowers on the foreclosure process. And it creates a national licensing and registration system for loan originators.”

Other effects on Fannie and Freddie

He continued, “The most significant changes, of course, involve Fannie and Freddie, which just five months ago were still subject to 30% capital surplus requirements, a punishment of sorts for their accounting scandals earlier in the decade. (Those surplus limits were lowered to 20% in March in order to marshal the companies’ aid in dealing with the mortgage crisis).

“When this bill becomes law, Fannie and Freddie will have a new, stronger regulator with the power to raise the companies’ capital standards and restrict executives’ pay. In the country’s most expensive areas, Fannie and Freddie’s permanent loan limit increases from $417,000 to $625,000. And they get an 18-month increase in their credit lines from the Treasury, should they need it.”

Wingfield also neatly laid out the bottom line:

“The biggest lesson in the months-long process of creating this bill is that the government will act swiftly when it’s concerned that certain entities are too important to fail. Congress first started examining predatory lending practices as far back as February 2007. But the event that really caused lawmakers to act was a massive sell-off in Fannie and Freddie’s stock two weeks ago. Since then, Republicans and Democrats have quickly put aside their differences in order to produce a housing bill.”

Susan Albright, a MinnPost managing editor, writes about national and foreign developments. She can be reached at salbright [at] minnpost [dot] com.

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