Dissing and Praising the Recent Housing Bill

This post is not meant to be a fair rendering of the recent housing bill.  It is meant to be a rendering of its faults.  Part of the difficulty here is the effort that would go into reading page-by-page the whole document.  My guess is relatively few legislators read the full document, and even staffers would have had a hard time making their way through it.

Now for “unbiased” renderings, I offer you:

• NPR
• MarketWatch
• Associated Press

The basic rendering of the bill revolves around the following:

• Help to Fannie Mae (FNM) and Freddie Mac (FRE) from the Treasury if they need it.  (Together with a supposedly stronger regulator)
• Refinancing help for homeowners under stress from the FHA.
• Grants for municipalities to buy abandoned properties.
• Housing tax breaks, including a credit to first time buyers.
• Money for pre-foreclosure counseling and legal services.
• Some profits from Fannie and Freddie will build affordable rental housing.  (They already do this…)

Unfortunately, our dear government has a tendency to give with the right hand, and take with the left.

• The bill eliminates down payment assistance programs, which is a good thing because those that get the assistance default more.  They don’t have the requisite maturity to own homes, with help, or without it.  (Also here.)  But it cuts down on housing demand in the short run.
• The effective mortgage rate from the FHA for refinancing will be high, around 8%.  That won’t help many people.
• The tax credits are no interest loans which have to be paid back over the earlier of 15 years, and when the house is sold.  That’s worth 10-20% of the nominal value.
• The GSEs get crisis funding, but also get their wings clipped.

Beyond that, the hybrid nature of the GSEs is retained, which is a source of some of the troubles.  Mixed economic motives tend to lead to irrational decisionmaking, which implies credit losses.

Finally, I will close with the idea that condemnation and destruction of buildings is a lousy strategy.  It is lousy, because it would be better to allow for bidding on the part of private entities to use the building and space.  Why drop the value to zero, when you can take the valuable property, and put it to its best alternative use?

In summary, this bill will costs a lot less than its sticker price advertised to the American people.  There is lots of show, and little go.  Personally, that makes me thankful, because the budget can’t bear with aggressive programs that cost a lot.  It really looks like the Republicans won on this one, and that leaves me puzzled, because the Democrats should have had the upper hand.

Comments

[An Idiot in...:]

Can anyone explain what the incentive is to banks if the loan reduction is voluntary on their behalf?

2008 Aug 06 04:17 PM

[rm:]

Yes... they can offload the worst of their loans at a higher price than they could get by selling them to a vulture fund. And, they could potentially net more than they would realize through short sale/REO.

2008 Aug 07 09:32 AM

[An Idiot in...:]

Can't they (banks) do that now? Why would they get a higher price? Is it because the current occupant/borrower is willing to pay a premium to stay in the house as opposed to an outside buyer who will only pay true market price?

I would understand the "bailout" (therefore the incentive) if the banks would get subsidized on the writedown amount by the govt (read Fannie or Fred). Perhaps I have cloudy vision but if I were a bank the only motivating factor for me would be if someone (anyone?) would cover my losses.

2008 Aug 07 09:55 AM

[rm:]

This bill gives investors a floor... so their losses may be lower if they participate in this bill, as opposed to selling their assets...

which allows them to offer principal forgiveness without the "moral hazard" of actually doing writedowns on existing loans.

The old argument was that if they did a writedown for you, then they'd have to do it for your neighbor.

Now they can tell the neighbor, "Hey, we CAN'T do one for you... because you don't qualify for this "special" program.

Also, many of the servicing agreeements don't have provision to write down principal, because it's such a foreign concept.

2008 Aug 07 03:05 PM

[An Idiot in...:]

Thanks, I guess does sugar coat the worst losses, making them easier to swallow by the banks.

However, the way it is being perceived by the commoners (myself included in the group-not the perception)) is that the banks/new law will help me save my house.

I am sure the panacea glow will wear off once they see that the new loan is "same as the old loan" in that as prices continue to decline their home will be underwater once again and God know what the government will do then.


On Aug 07 03:05 PM rm wrote:

> This bill gives investors a floor... so their losses may be lower
> if they participate in this bill, as opposed to selling their assets...
>
>
> which allows them to offer principal forgiveness without the "moral
> hazard" of actually doing writedowns on existing loans.
>
> The old argument was that if they did a writedown for you, then they'd
> have to do it for your neighbor.
>
> Now they can tell the neighbor, "Hey, we CAN'T do one for you...
> because you don't qualify for this "special" program.
>
> Also, many of the servicing agreeements don't have provision to write
> down principal, because it's such a foreign concept.

2008 Aug 07 05:30 PM

[rm:]

[However, the way it is being perceived by the commoners (myself included in the group-not the perception)) is that the banks/new law will help me save my house. ]

It will help some... 1 in 5 homeowners, at best... and that's assuming that they "use up" the program in the first 24 months.

Some are thinking that this may encourage lenders to do more modifications... and they ARE doing more modifications... but on your own, or even with "HOPE" Now, you've got coin-flip odds.

If you hook up with someone who really knows how to work the system, you can boost your odds dramatically.

2008 Aug 08 12:08 AM

[An Idiot in...:]

Ironic that you mention HOPE Now since I called them yesterday to prove a point. I asked them if it was wise to sue the lenders and force them to produce the note ( popular defense nowadays) and I got a resounding NO. HOPE now is the CCS for mortgages-I dont believe they have the purest best intentions for the consumer since they are bank/lender financed.

2008 Aug 08 01:37 PM