A Mixed Bag

Will the U.S. Senate smooth out the kinks? The mortgage-relief bill passed by the House on Wednesday has some noble objectives. It seeks to protect hundred of thousands of homeowners from foreclosure and to extract concessions from lenders who floated risky mortgages built to fail. It favors owners of modest means who actually occupy their homes while leaving speculators in pricier properties exposed to market discipline. It creates loan-loss reserves funded by exit fees from relieved lenders and insurance premiums from relieved borrowers. It stiffens disclosure requirements for lenders and mandates a seven-day waiting period between the delivery of mortgage documents and closing. These are all good.

Now for the bad and the ugly. Yesterday I penned my disgust with the GSE bailout. Not only has the Treasury Department been given a blank check for loaning backup to the terrible twins, Fannie Mae and Freddie Mac, but it is not even required by law to demand the most senior position among lenders to these entities. This feeds the suspicion that the bill is intended to prop up Fannie and Freddie's debt (to the debtholders' benefit) as much as it is to rescue borrowers from sky-high mortgage payments.

Other flies in the ointment:

A one-year moratorium on risk-based pricing for FHA-insured loans. The Federal Home Administration is a government program that actually works. It helps mortgage borrowers with weak credit or little upfront cash, and it does so without costing taxpayers money. Congress wants the FHA to insure another $300 billion in home loans, almost doubling its exposure, while preventing it from charging high-risk borrowers extra. Said FHA Commissioner Brian Montgomery at a hearing this spring, "the FHA should not be forced legislatively to compromise its fundamental [lending] criteria at the future expense of the taxpayer." Sorry, Brian, consider yourself forced.

A tax credit for first-time home buyers. This obviously departs from the main mission of rescuing borrowers trapped in unaffordable mortgages. At the same time that the House bill insists on adequate down payments for refinanced loans, it offers to cover (up to $7,500) the down payments of new borrowers with 15-year interest-free loans. These are taxpayer-funded teasers, all risk and no return--a desperate attempt to chew through the housing glut while possibly ensnaring a new generation of distressed borrowers.

A permanent increase in conforming loan caps. Remember that back in February the economic stimulus package passed by Congress temporarily raised the limit for a Fannie or Freddie loan. The new bill makes the increase permanent, from $417,00 to $625,000. Again I ask, how does this help low- and middle-income homeowners? The new cap serves only to restore liquidity and prop up values in the high-end market, where borrowers should have known better.

[update, July 30--]
The National Association of Home Builders admitted in a statement today who benefits most from the temporary tax credit for first-time buyers: "the tax credit will stimulate home buying, reduce excess supply in housing markets and shore up home prices." In other words, the ones who over-built in the first place get to hawk their inventory (buyer-assistance courtesy of the American taxpayer) before prices crash completely.