CNN reports that the Senate is now ready to “finally pass a comprehensive housing and foreclosure prevention bill.” Well, thank God Congress is finally getting involved in the mortgage industry! The laissez-faire attitude that has characterized the legislative branch’s reluctance to involve itself in economic issues for decades has allowed all those predatory lenders to get away with murder! It’s high time our elected representatives put a stop to it!
If you believe that, you’re reading the wrong blog. Let’s take a closer look at the bill the media hails as a long-overdue “fix” to the country’s mortgage woes. Again from CNN:
“The omnibus housing package attempts to address the housing crisis in several ways. Among them is providing more relief for some borrowers facing foreclosure; increasing access to mortgages in higher-cost areas; modernizing the loan guidelines for the Federal Housing Administration (FHA); and more stringently regulating Fannie and Freddie, the government-sponsored enterprises that have taken a beating this week amidst concern over how well funded they are.”
Let’s review each of the main points of the plan, but with a bit more critical reasoning than those at CNN exhibit.
FHA role expansion. Under the Senate bill, the FHA could insure up to $300 billion in new 30-year fixed rate mortgages for at-risk borrowers if their lenders agree to write down their loan balances to 90% of the current appraised value of their homes.
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So now the taxpayer will be forced to subsidize and thereby encourage even more lending to the same people who shouldn’t have gotten mortgages in the first place.
Create a new regulator for Fannie and Freddie. The GSEs [government sponsored enterprises], which grease the wheels of the housing market by guaranteeing the purchase and trade of mortgages, will get a new regulator under the bill. That regulator, among other things, will have a greater say over how well funded the agencies are – a major concern in the markets that has sent stocks in both companies plunging.
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Fannie and Freddie have been regulated by Congress since they were first created by Congress. They now hold or back $5 trillion in mortgage debt, and are on the verge of financial collapse. The problem has never been lack of oversight. The problem has been the economically irrational decision to involve the federal government in what should be a purely private, free-market activity.
Raise conforming loan limits. The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to $625,000 from $417,000. The FHA maximum loan limits for high-cost areas would also increase to $625,000. The House bill raises the limit at all three agencies to nearly $730,000.
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Just in case you were under the impression that these agencies exist to help first-time homeowners, keep in mind that even in Orange County, California, the median home price is “only” $537K. By raising the loan limits for the FHA, Fannie Mae, and Freddie Mac, these Government Sponsored Enterprises are not helping underprivileged first-time homebuyers – they’re helping people far wealthier than most get a better interest rate on that vacation home on the 16th green.
Help states buy foreclosed properties. Despite a White House veto threat, the Senate bill still contains a provision that would provide states with $4 billion to buy and fix up foreclosed properties.
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So now state governments will be in the business of flipping houses. The taxpayers will be forced to part with $4B of their own money so that local governments can use it to crowd out private real estate investors. The state-run “flips” will by definition not reflect actual consumer preferences, since the states don’t have to invest their own scarce resources according to market signals. They will be able to play real estate investor for free, using our money.
Most people realize that when you find yourself in a hole, the first thing to do is to stop digging. Congress, on the other hand, believes that once they’re in a hole they just need a bigger shovel. The current omnibus housing and foreclosure bill will only exacerbate the problems in the mortgage market. This is completely predictable. Sadly though, even with all the problems this new bill will cause, plus all of the previous government manipulation of the housing market, politicians and the media continue to overlook government’s role in creating this mess. Senator Chis Dodd even has the nerve to claim “market failure.”
“A lot of us hoped the market would take care of all of this and there would be light at the end of the tunnel, [but now] the only light at the end of the tunnel is a train coming.”
He may be right about that – but the train barreling down upon us is run by Congress.
