The Foreclosure Prevention Act (a k a the Bank and Builder Bailout Act)
By Dean Baker
t r u t h o u t | Perspective
Monday 07 April 2008
Conservatives used to complain liberals always wanted to throw money at problems.
While there may have been some truth at times to this charge, Congress decided
to literally take this path in its approach to the housing bubble last week.
There are many villains in the story of the housing bubble, but the homebuilders
and the mortgage industry would go on almost everyone's list. The homebuilders
rushed ahead with new developments under the delusion the bubble would last
forever. The result is an unprecedented glut in housing.
The mortgage industry aggressively promoted adjustable rate mortgages to the
most vulnerable segments of the population, giving us the subprime crisis. They
didn't care mortgages couldn't be paid because they could dump them into the
secondary market almost immediately after they were issued.
During their spring recess, members of Congress heard from angry constituents
who feared the loss of their home or the loss of much of their home equity due
to plunging house prices. This prompted Congress to rush into action when it
came back into session last week.
The centerpiece of the "Foreclosure Prevention Act" approved by the
Senate is a tax break for the homebuilders and the mortgage bankers - in effect
throwing taxpayer dollars at two of the industries most responsible for the
housing bubble. That should satisfy troubled homeowners.
But this may not be the end of it. There are plans for a large-scale buyout
of bad mortgage debt. There are several different proposals being circulated,
but the basic story is the same. The government would guarantee new mortgages
that would be used to buy up existing mortgages of homes facing foreclosure.
While the new mortgages would be issued at prices that are less than the value
of the original mortgage, they will almost certainly give the banks far more
money than if the market was left alone.
For example, a bank may have issued a mortgage for $220,000 on a home that
is now worth $200,000. Under the various proposals, the government-guaranteed
mortgage would give the bank a check for between $170,000 and $200,000. This
means a loss for the bank, but, almost certainly, a much smaller loss than if
it carried through the foreclosure.
The handout to the banks is justified as an effort to keep homeowners in their
houses. This may be reasonable in depressed markets like Detroit or Cleveland,
but simple arithmetic shows this plan provides no benefit to homeowners in bubble-inflated
markets like Los Angeles and Boston.
In these markets, houses now sell for more than 20 times the annual rent on
a comparable unit. This means, even with a low 6 percent mortgage, after adding
in taxes, insurance and maintenance, homeowners will likely pay 60 percent to
80 percent more in housing costs than if they rented. The additional housing
costs will come at the expense of health care, quality childcare, and other
necessary expenses. Furthermore, since house prices are falling in these bubble
markets, it is extremely unlikely these families will accumulate any equity.
In short, just like the tax breaks approved last week, these bailout proposals
are yet another way to put money in the pockets of bankers under the guise of
helping homeowners.
There are real ways to help homeowners facing foreclosure. Amending the bankruptcy
law to allow judges to rewrite the terms of home mortgages, so families can
keep their home, would be a good start. We can also change the rules on foreclosure
to allow homeowners the option to remain in their home as renters paying the
fair market rent.
This would provide security to homeowners, since they could not just be thrown
out on the street. More importantly, it would provide lenders with a real incentive
to negotiate terms that allow homeowners to stay in their homes as owners, since
banks do not want to become landlords.
The Fed and Congress were incredibly negligent in allowing the housing bubble
to grow to such enormous proportions. Acting on the advice of economists who
couldn't see the bubble, Congress now seems determined to compound this failure.
It is trying to hand as many taxpayer dollars as possible to the banks in a
futile attempt to prop up the bubble and keep homes unaffordable for young people.
Thankfully, it is an election year.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.
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