May 5, 2008 – Unless you are riding around in a limousine, the chances are that price of gas has been impacting your lifestyle. And if you own a home with an adjustable rate mortgage, then your pain has likely been multiplied as you watch your mortgage payments go up too. The value of the dollar continues to fall. Prices… on nearly everything… have been going up. And average citizens, most of whom have done nothing wrong, are the ones feeling the pain. Why is all this happening? Well, the answer is largely because our elected officials have not been doing their jobs. And a new housing bill which is full of good intent is poised to make things even worse for the economy in general, and for taxpayers specifically. If you still have any disposable income, you may want to hold onto your wallet tightly.

Barney Frank (D-NY) has been trying to help homeowners who got steered into loans they couldn’t afford hold onto their homes. There is nothing wrong with that. In fact, virtually everyone agrees that something needs to be done to stabilize the mortgage lending industry. But Frank is pushing a bill that will place the cost for many risky mortgages on the backs of taxpayers, rather than making the lenders who made these risky loans pay the cost. If the bill passes, it is likely to drive the price of the dollar down further (making the prices we pay for… everything… go higher), and could eventually lead to a tax increase.

The cost of Frank’s bill, known as the FHA Housing Stabilization and Homeownership Retention Act, could be as high as $300 billion. Under the bill, the FHA would agree to insure even the most risky loans made by banks. In return, the government “hopes” that by reducing the lender’s risk in these loans that lenders will renegotiate their terms making them more affordable to homeowners.

The best part is that the program is “voluntary”. Lenders won’t have to participate. This could mean that the lenders that do participate will actually be those who have the riskiest loan portfolios.

How effective the bill would be at reducing foreclosures is really just a guess. Unfortunately, the lenders who made risky loans have sold most of the loans they’ve made to third party investors. Many of the investor groups that have purchased these mortgages have been very reluctant to participate in any program that would reduce the return on their investments.

The fact that many lenders service loans that they don’t own also means that even if a lender agrees to participate in the program, it won’t be able to agree to the government’s terms for many of the loans that they service? Confused yet? Just imaging how borrowers will feel when they see in the paper that their lender has agreed to participate, but when the call the lender they are told that nothing can be done to help them.

Tax payers should not be the ones paying for the cost of bad loans. The lenders who made these loans, and the investors who purchased them on the secondary market, should pay those costs. And there is a simple way to make sure that this happens. Congress should pass bankruptcy reform that allows judges to reset the terms of risky mortgages. A proposal to do just that appears to have died in Congress largely due to the lobbying efforts of lenders. Now that’s a big surprise! The bill needs to be resurrected.

In addition to these measures, the FED needs to do its job too. For the past several months, the FED thought that it could help stabilize housing markets by reducing interest rates. Unfortunately, that hasn’t worked. In fact, lenders have tightened their standards so much that even people with good incomes and money in the bank are having difficulty getting home loans. At the same time, every time the FED lowers interest rates, it is also lowering the value of the dollar and contributing to inflation.

The FED needs to send a clear message to world markets that it is back in business and fighting inflation. That means increasing interest rates.

Unfortunately, neither Congress nor the FED have shown that they have the stomach to do either of these things. Congress is too worried about protecting their campaign contributors and the FED just lowered interest rates again last week. The White House has been virtually no help either. President Bush has threatened to veto any bankruptcy legislation that passes over his desk.

So while Washington dilly-dallies, people are losing their homes, gas and food prices continue to rise and it appears that Congress is going to ask tax payers to “suck it up” again. And if you think that there may be some relief in store after the November elections, think again. On the Democratic side of the equation, Hillary Clinton and Barak Obama are the number one and two recipients in the Senate of money from the banking sector respectively. And on the republican side Banking is the ninth largest industry sector contributing to John McCain. This means that regardless of who gets elected, all of these candidate are more likely to make tax payers foot the bill for the mistakes of lenders.

Maybe its time that we could select “None of the above” when we go to the polls. With three hundred million people in this country, their have to be at least two people who are better qualified to represent the American PEOPLE that any of the candidates running this year.

by Jim Malmberg

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