It was most interesting that President Bush quietly signed the housing bill into law with absolutely no fanfare. In fact, it was done in a private setting with nobody there. Economists, consumer advocates and other analysts said the package of programs for struggling homeowners and shaken mortgage lenders is unlikely to relieve the foreclosure crisis that is driving the nation toward a deeper recession. I am not sure what short or long term effect this legislation will actually have on our nation’s economy. Hopefully, it isn’t just another governmental blunder when it comes to helping ordinary folks who are in real turmoil. It’s evident that the housing market is in real trouble and that our economy is being badly hurt as a result. Jared Bernstein, a senior economist at the Economic Policy Institute, observed:
This is not the end of the housing crunch. Housing prices have already fallen 15% and they need to fall 10% more. This bill isn’t going to change that equation.
The bill signed by the President seeks to halt the steepest slide in house prices in a generation, rescue hundreds of thousands of families from foreclosure and restore confidence in the nation’s largest mortgage-finance firms. During Senate debate, Senator Chris Dodd, chairman of the Senate Banking Committee and one of the bill’s lead sponsors, cited a long list of grim statistics relating to the mortgage crisis. He pointed out that an estimated 8,500 families a day at that time were falling into foreclosure and that one in every eight homes was projected to enter foreclosure over the next five years. Senator Dodd told his colleagues:
This legislation will not perform miracles. I want the American people to have realistic expectations about what we’re about to do. But as others have said, it is a step, and an important step, towards putting our nation on the road to economic recovery.
Some say the bill contains provisions that are bailouts for “irresponsible borrowers and risk-addicted financial institutions” that could wind up costing taxpayers hundreds of billions of dollars. Hopefully, those predictions will miss the mark. Clearly, the members of Congress had to respond to a crisis that has pushed more than 1.5 million families into foreclosure. Even though what they did has obvious political risks, it was evident that something had to be done. Most all analysts believe lawmakers had little choice but to act.
The measure grants Treasury Secretary Henry Paulson authority to extend an unlimited line of credit to Fannie Mae and Freddie Mac, a move aimed at reassuring global markets that the firms, which back nearly half of all outstanding mortgages in the United States, will not be allowed to fail. The package also contains a strong new regulator for Fannie Mae and Freddie Mac and an overhaul of the Federal Housing Administration, the nation’s largest provider of mortgage insurance. More will be said about these two entities in another section of this issue.
Although Congressional budget analysts have concluded that Fannie Mae and Freddie Mac are sound and unlikely to need any government help, they said there is an outside chance the companies could call upon Treasury for more than $100 billion. The centerpiece of the legislation is a plan to prevent as many as 400,000 foreclosures by authorizing the FHA to help people who, because of falling prices, owe the banks more than their homes are worth. If lenders agree to forgive a portion of the debt and write new loans worth no more than 90% of the home’s current, lower value, the FHA will insure the new loans and agree to pay off the lenders if borrowers default.
Homeowners also would get an immediate equity stake in their properties, which they would have to share with the government if they sell or refinance. Perhaps with good reason, consumer advocates have their doubts about this legislation. While more than a year has passed since the mortgage crisis began, banks are still foreclosing on far more loans than they modify. In May, as a coalition of lenders known as the Hope Now Alliance modified 70,000 loans, RealtyTrac reported 261,000 foreclosure filings. An April report by the State Foreclosure Prevention Working Group found that 70% of seriously delinquent borrowers were not receiving help. Alys Cohen, a staff attorney at the National Consumer Law Center, observed:
How effective can the FHA refinancing program be in light of how slow and ineffective mortgage servicers have been so far? We’re encouraged that steps are being taken. But we’re worried.
Only time will tell if this legislation will prove to be a good thing for the American people. Many believe that the federal government had to have known the massive problem existed and should have acted much sooner. Instead, they waited until the cows were out of the barn before shutting the barn door. The regulators, Congress, and President Bush have to share the blame for that. The American taxpayers and those citizens who have already faced foreclosure or will in the near future have every right to be “mad as the dickens” with those responsible for this mess.
Source: Washington Post
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