Whose money is it anyway?
The governor of the Bank of Canada says he will take a tough stand with financial institutions that wind up near bankruptcy because of poor decisions.
Mark Carney says the central bank won’t be bailing out Canadian financial institutions like the U.S. government (The Canadian Press 05/01/2008)
President Bush seems to agree with this, well at least partially. The Bush administration on Tuesday threatened to veto a bill moving through the House of Representatives that would send grants and loans to state governments for buying and fixing up foreclosed homes.
Calling the measure “a costly bailout for lenders and speculators,” the White House said in a statement that if the House bill were presented to President George W. Bush, his advisers would recommend that he veto it.
“The principal beneficiaries of this type of plan would be private lenders — who are now the owners of the vacant or foreclosed properties — instead of struggling homeowners who are working hard to stay in their homes,” the statement said.
The bill is part of a sweeping package of housing measures expected to come to the House floor for a vote on Wednesday.
Lawmakers are toying with a number of bills or to put it more bluntly with our tax dollars to bail out irresponsible lenders and borrowers who landed us in this mess in the first place! Here is a snapshot of the various proposals to spend our tax dollars.
Hope for Homeowners Act: Championed by Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., this is the most-aggressive solution in play for struggling homeowners.
It would allow the Federal Housing Administration to refinance up to $300 billion in unaffordable mortgages for up to 2 million owner-occupied homes. It would also give states $10 billion to buy and fix up foreclosed homes.
According to Reuters News (Al Yoon 05/06/2008) Federal Housing Commissioner Brian Montgomery expressed concern over the bill
“We are all trying to do the same thing … but we want to make sure we are not doing it on the backs of the taxpayers,” he said. The current plan “really throws the barn door open,” Montgomery said to the Boston MBA conference.
Changes sought by lawmakers could mean taxpayers would ultimately assume financial responsibility for loans destined for default, he said.
“There are a lot of loans out there that shouldn’t have been made in the first place,” he told reporters.
Politicians want bankruptcy reform under this proposal lawmakers want to change the nation’s bankruptcy laws. This is the single change that consumer advocates say would do most to help people facing foreclosure - but it faces fierce industry and Republican opposition.
The proposed change would allow Bankruptcy Court judges to modify terms of a mortgage, such as writing down its principal to whatever the house is currently worth, lowering the interest rate or changing the contract length.
Neighborhood Stabilization Act: This bill sets up a $15 billion fund for states to buy, fix up and resell or rent out owner-vacated foreclosed homes as low-income housing. The homes would be sold to families with incomes below 140 percent of an area’s median.
H.R. 5818 would give grants and loans to hard-hit states and localities to purchase foreclosed properties and rehabilitate them for resale or rental, at a federal cost of $8.4 billion. The funds would be distributed on the basis of actual and likely future foreclosures in communities where subprime loans, mortgage defaults, and mortgage delinquencies are prevalent.
Supporters of the bill say that lenders would benefit from the purchase of their foreclosed properties but not excessively so, since buyers would purchase the properties at a discount from their current value. Homeowners in these communities who are not facing foreclosure will also benefit, as local home prices will fall less, and neighborhood conditions will become more stable, than in the absence of the bill.
The Washington Post reports that Fannie Mae is now allowing homeowners to refinance amounts equal to 120 percent of appraised value. This is a difficult move to justify from the standpoint of either taxpayers or homeowners.
Dean Baker Co-Director of the Center for Economic and Policy Research, in Washington, D.C commenting on the Fannie May policy said “The basic point is that homeowners will start out in these mortgages hugely underwater. Fannie’s policy means that it is prepared to lend $360,000 on a home that is appraised at $300,000. This gap implies that the homeowner can effectively put $60,000 in their pocket by turning the house back to the bank the day after the loan is issued. If the price drops another 10 percent in a year (prices are currently falling at an annual rate of more than 20 percent in the Case-Shiller 20 City Index), then this homeowner will be $90,000 underwater next May. If a seller would face 6 percent transactions costs, then in this example, walking away would provide a $106,000 premium compared with the option of a short sale.
This gap provides an enormous incentive for homeowners to default on their mortgage. Many homeowners will undoubtedly choose this option rather than make excessive mortgage payments on a house that is worth far less than the mortgage. A high default rate will of course lead to large losses for Fannie Mae and increase the likelihood that it will need a taxpayer bailout.
Fannie’s policy does have the effect of aiding banks that made bad mortgages. The new mortgages will allow these mortgages to be paid off. If matters were left to the market, the banks would almost certainly suffer large losses. It is difficult to understand the rationale for this policy. In addition to putting the taxpayers at risk for no obvious public end, it reduces the money that Fannie has available to support viable mortgages.
There is nothing in recent news to suggest that housing is approaching a bottom or even that the rate of price decline is likely to slow. The record rates of foreclosure ensure that a substantial supply of homes continue to be brought to the market even at a time when inventory to sales ratios are already extraordinarily high. Builders also have an extraordinary backlog of unsold new homes (the supply is even larger than indicated in the Census data, since the data do not include homes where an initial sale was cancelled).
Tightening credit, coupled with a weakening economy and job loss, is constraining demand. Another factor that is likely to further constrict demand in the months ahead is higher interest rates. The 10-year treasury rate has been trending upwards, and the 30-year mortgage rate has moved with it. The Fed’s rate cut last week pushed up the 10-year rate by a few additional basis points.
It seems clear at this point that the Fed has little ability to lower long-term interest rates barring extraordinary measures (e.g. directly buying 10-year treasuries). With inflation rate hovering in the range of 3.0 percent to 4.0 percent, the real rate on the 10-year treasury bond is extraordinarily low at present. This low rate is especially striking since the dollar has been consistently declining in value for the last six years. It is likely that investors will increasingly switch their holdings to stronger currencies putting upward pressure on the 10-year treasury rate and the 30-year mortgage rate. While mortgage rates are unlikely to spike, even a modest drift upward to 6.5-7.0 percent would be very bad news for the housing market at present.
The other factor that will of course be depressing demand for housing is the weak labor market. The economy has been shedding jobs for four consecutive months and it is unlikely to turn around any time soon. The fact that this job loss has not been reflected in a sharp rise in unemployment is most likely attributable to the peculiarities of the household survey. Surveys clearly show that workers are increasingly pessimistic over their employment prospects, which does not provide a basis for a strong housing market.”
Most taxpayers are not responsible for the actions of greedy lenders and greedier homebuyers, why should they be responsible for bailing them out?