Wednesday, May 07, 2008

In an Election Year, Anything Goes

The House is palavering over the pro’s and con’s of a housing package that Politicians want you to believe has a little something for everyone.
In truth, it does have something for everyone, but not what you might think…not in a positive way.

The proposal would get the government—translation: You and me--to guarantee loans for homeowners who have one foot on the front porch and the other in foreclosure.

As you might imagine, not a lot of Republican support for this gambit, and for good reason. If the loan is at risk of foreclosure, either do a work out with the people, or pull the trigger. I have no interest in guaranteeing a shaky deal, knowing food and gasoline prices are going to continue to rise for the foreseeable future. When it’s a choice between feeding a family and making the house payment, guess who comes in second?

The bill is sponsored by the Chairman of the House Financial Services Committee, good ol’ Barney Frank, and it would call for the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years.The caveat is, lenders must agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

Let’s think this through: If the outstanding debt is reduced 15%, who’s eating the equity? Take it a step further: If the appraisal comes back lower than the original review (and with housing in the crapper, it will) then the new valuation is going to create a ripple effect in those communities who depend upon real estate taxes—based upon valuation—to fund schools, police, fire, and other public services.

Barney Frank
is opening a pandora’s box of demons that will actually extend the pain from the private sector into the public sector…and cause untold damage to city, county, and state operating budgets from the inevitable shortfall of revenues.

Oh, but we’re only walking about 1.4- million loans that might be eligible for such a program. In fact, the Congressional Budget Office estimates we’d end up insuring a half-million borrowers at a cost of $2.7 billion over 5 years. That may seem like a fraction of a fraction of the home oans that are out there—and it is. However, you know as well as I that once home values start to decline, like one bad apple in the barrel, one repo’d house in a neighborhood, the rest of the block suffers, too.

The package also includes elements that would "modernize" the Federal Housing Administration (FHA) and tighter oversight of Fannie Mae and Freddie Mac. Barney’s Bill includes another measure the White House wants: the issuance by states of another $10 billion in tax-free municipal bonds, the proceeds from which could be used to subsidize mortgage refinancing for subprime borrowers. The way it works now, state and local housing agencies are only allowed to issue tax-free bonds to help subsidize mortgages for first-time home buyers or those purchasing property in distressed areas.

Why do we need to subsidize those who cannot otherwise accomplish a home purchase? Are we not just buying them a peck of trouble? We’ve been “subsidizing” shaky borrowers all along, which is why we’re where we are right now, and the Politicians are playing this to the hilt:

We’re the Government.
We’re here to help.
It’s an election year.
Here, let me forestall the inevitable, and lower your loan amount. Never mind you’re still not going to be able to pay for it by Christmas…

By then, of course, the elections will be past.

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