The Housing Chronicles Blog: Housing rescue plans: a summary

Tuesday, March 4, 2008

Housing rescue plans: a summary

With the various housing rescue plans being floated by Congress, Fed Chair Ben Bernanke, Wall Street and community groups, it's hard to keep track of each one's respective merits. Fortunately, CNNMoney.com has posted a story that allows a much easier apples-to-apples comparison:

The Government Fix

The government buys at-risk mortgages from lenders at steep discounts, restructures the loans to reduce payments and resells the loans in secondary markets. Investors in mortgage-backed securities take a loss, but get most of their investment back. Borrowers get refinanced mortgages...

The plan would jump-start the market for mortgages by establishing a true market value for the securities backed by these loans. Then investors would start buying the securities again, creating liquidity and making it easier for borrowers to get a mortgage...

"I'm not interested in bailing out investors, lenders and speculators," Treasury Secretary Henry Paulson said last week. "I'm focused on solutions targeted at struggling homeowners who want to keep their homes."

How Paulson hopes to sort out speculators from "struggling homeowners" when years of attempts by builders and some lenders to clamp down on the practice is a good question. Hopefully we'll get an answer before it's too late.

Seed funding of between $10 billion and $20 billion, much of which could be recovered if the plans self-fund. ..

Legislation has not been introduced, although Dodd is still actively pursuing it. It will be difficult to win Republican support for the plan.

The Wall Street Fix

Like the Dodd and Frank plans, a Bank of America proposal calls for buying up troubled mortgages, modifying them to make them affordable, and repackaging them for sale in secondary markets. The difference: Freddie Mac and Fannie Mae, two government sponsored enterprises, would buy the troubled loans. A similar plan from Credit Suisse would refinance the troubled loans with FHA-insured mortgages. These would be private transactions backed by insurance administered by the FHA. Borrowers would pay for the insurance...

The plan would jump-start the market for mortgages by establishing a true market value for the securities backed by these loans. Then investors would start buying the securities again, creating liquidity and making it easier for borrowers to get a mortgage...

Lenders and many consumer and community activist groups support the banks' ideas. Free-market advocates generally like them because they encourage the market to work independently of the government. (Against it is) The Bush administration, which so far is trying keep the government in advisory or support roles.

Uh-huh. And, as Dr. Phil might say (in between not-so-secret visits to Brittany Spears), "How's that working out for you?"

No cost to taxpayers has been discussed, but the Bank of America plan would involve the same kind of seed money - $10 billion to $20 billion - as the Dodd and Frank plans. While the Credit Suisse proposal wouldn't require an initial investment, it would transfer risk from private lenders to the government, which would mean that taxpayers may have to bear some costs of defaults.

The Community Development Fund Fix

The Foreclosure Prevention Act of 2008, a bill that is before Congress, calls for states and towns to use community development funds - administered by the Treasury Department and usually used to boost lending in underserved cities and neighborhoods - to buy foreclosed properties, rehab them and sell or rent them...

The bill was introduced by Senate Democrats and is backed by community and consumer advocates, as well as the representatives of cities hit hard by foreclosures such as Detroit and Cleveland.
Republicans blocked a Senate vote on Thursday that would have helped the bill pass quickly. Only one Republican, Sen. Gordon Smith of Oregon, voted to consider the bill. The community development fund, however, was not singled out for criticism.

A term comes to mind here: "fiddling while Rome burns." Perhaps it would've been considered had it included riders for prayer in schools and other such distractions?

Likely to be enacted as part of a larger bill, according Jaret Seiberg, financial services analyst for policy research firm Stanford Group.

The tax-exempt state bonds fix

This idea would allow housing finance agencies, which are state chartered organizations created to help low- to moderate-income home buyers get mortgages, to issue tax-exempt bonds to help troubled home owners refinance mortgages. Under current regulations, these bonds can only be used to finance below-market-rate mortgages for first-time home buyers. The plan would also expand the dollar amount of bonds that the state agencies could sell by $10 billion over the next three years...

Home owners struggling with high-cost mortgages could refinance into low-interest-rate loans through this program. Lenders would get their principal back and borrowers would lower their monthly payments...

Practically everybody, including the Republicans in Congress, as well as Democrats and the Bush Administration, have come out in favor of this proposal...

The states have given this proposal a lukewarm reception. Many already sell as many of the bonds as they can, according to a spokesman for Rep. Frank, so increasing the loan limits would have little impact...

One wonders how California could even afford such an idea given the state's current financial condition. We might have to consider selling off the Governor's prized cigar collection.

This plan should be self-sustaining, but the federal government will take a revenue hit because the bonds are tax-free...

This has a good chance to pass as part of the Foreclosure Prevention Act of 2008, or if it is attached to another economic stimulus bill, said Seiberg.

1 comment:

Judy Graff said...

Patrick, this is a great summary. If it's okay with you, I will post it on my blog at sfvrealestate.blogspot.com.