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May 9, 2008 – The House of Representatives passed a mortgage bailout bill today despite a presidential veto threat. Although the bill has the potential to help hundreds of thousands of homeowners, it is also voluntary for lenders to participate. And because of the way that lenders have sold off most of the mortgages they have made on the secondary market, even if lenders participate there is significant doubt about how many of their customers will actually be able to benefit from the legislation if it ever does become law.
The bill, which was championed by Rep. Barney Frank, has the potential to help many troubled homeowners. According to the Congressional Budget Office, as many as 500,000 homeowners facing foreclosure over the next year might be able to keep their homes if the companies holding their mortgages agree to participate.
Under the terms of the bill, participating lenders would have to agree to take a short-sale price equivalent to 85% of a home’s appraised value. In return for this consideration, the homeowner could then be given a FHA insured fixed rate loan.
There are a number of problems with the legislation as it is currently written. As previously mentioned, participation by lenders is voluntary and not all homeowners will qualify even if their lender does participate. More troublingly, lenders could elect to participate only for certain loans. In other words, they could transfer their riskiest loans into the program, increasing the chances that tax payers will eventually be called upon to foot the bill for any new mortgages issued.
To minimize the risk to taxpayers, the bill does contain an interesting provision. Borrowers who get new FHA backed loans under the program would have to agree to share any profit they make on the sale of their home with the government. But the impact of this type of provision is really unknown. Most intelligent borrowers would hold onto their home until they are in a break-even position and then sell. This would allow them to walk away without owing any additional monies to the government.
The Senate Banking Committee is expected to start working on its own version of this legislation next week. It will likely move out of committee quickly and to the Senate floor for a vote. With the November elections looming, neither the House nor the Senate want to look like they are resting on their laurels while voters lose their homes.
Depending upon what a final, compromise bill looks like, it is likely that final legislation will reach the President’s desk early this summer. Whether or not the President will actually veto a final bill is anybody’s guess. The Bush administration has indicated that any bill that would bail out speculators will not be signed into law. While ACCESS agrees with this principle, we are also against any bill that will bail out the lenders that have been the primary cause for all of the problems within the mortgage industry. This is precisely what this bill does.
Instead of this bill, the Congress should change bankruptcy law to allow judges to modify the terms of mortgages on principle residences. Lenders have been vehemently opposed to this idea. But the lenders are the ones who made bad home loans. They are the ones that designed their compensation programs to reward brokers and loan offices for steering consumers into higher priced loans. And in many cases they knew that brokers were refinancing people out of fixed rate loans that were affordable into adjustable rate loans which the consumer had absolutely no chance of being able to afford. Therefore, the logical conclusion is that lenders, not tax payers, should be left with the bill for these bad loans.
Changing the bankruptcy law would accomplish this. It would also have the added benefit of saving the homes of consumers even when their lender doesn’t agree to participate in a voluntary government program like the one Barney Frank is trying to put in place.
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