Although he hasn't yet signed the housing bill passed by the Senate this weekend, President Bush removed his objections to the measure and is scheduled to sign it soon.
It's a big band-aid for an even-bigger problem, but it does offer some relief to some homeowners and to local communities where foreclosures have hit hardest. The bill also authorizes new oversight for Fannie Mae and Freddie Mac,and pumps additional funding into FHA:
The bill establishes a $300-billion fund under the Federal Housing Administration to help distressed homeowners get more affordable, government-backed mortgages and get out from under exotic mortgages they cannot afford.
The success of the temporary fund will depend on lenders' willingness to accept losses on original loans to shift overstretched borrowers into new loans. An estimated 400,000 families could be helped by the program.
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The bill sends about $4 billion in grants to communities to help them buy and repair foreclosed homes; offers tax breaks to spur home-buying; sets up the first national licensing system for mortgage brokers and loan officers; and raises the limit on the size of mortgages that federal agencies can guarantee.
Fannie Mae and Freddie Mac, the government secured entities (GSEs) that insure most home loans, will have tighter oversight. They will also be able to apply for an additional line of credit:
As private finance has retreated from the mortgage sector, the importance of Fannie Mae and Freddie Mac has grown, and they own or guarantee almost half the country's $12 trillion in outstanding home mortgage debt.
Under a provision put into the bill late in its development at the administration's urging, Fannie and Freddie could draw on a temporary line of U.S. Treasury credit or the government could buy shares in them, if they ran into trouble.
The bill also creates a new regulator for the shareholder-owned companies with sharper teeth than the existing one, including power over their capital levels and over their executive compensation and internal financial controls, and with Federal Reserve consultation.
Paul Krugman offers a good analysis of the bill and the problems that prompted it:
This bill is the latest in a series of temporary fixes to the financial system – attempts to hold the thing together with bungee cords and masking tape – that have, at least so far, succeeded in staving off complete collapse. But those fixes have done nothing to resolve the system's underlying flaws. In fact, they set the stage for even bigger future disasters – unless they're followed up with fundamental reforms.
Before I get to that, let's be clear about one thing: Even if this bill succeeds in its aims, heading off a severe credit contraction and helping some homeowners avoid foreclosure, it won't change the fact that this decade's double bubble, in housing prices and loose lending, has been a disaster for millions of Americans.
After all, the new bill will, at best, make a modest dent in the rate of foreclosures. And it does nothing at all for those who aren't in danger of losing their houses but are seeing much if not all of their net worth wiped out – a particularly bitter blow to Americans who are nearing retirement, or thought they were until they discovered that they couldn't afford to stop working.
But he contends that the bigger problems - banks establishing subsidiaries that engage in risky lending practices, the under-regulation of the financial service sector in general, and too-cozy relationships between Fannie and Freddie and that very same financial services sector - need a 21st century makeover:
The moral of this story seems clear – and it's what Barney Frank, the chairman of the House Financial Services Committee, has been saying for some time: Financial regulation needs to be extended to cover a much wider range of institutions. Basically, the financial framework created in the 1930s, which brought generations of relative stability, needs to be updated to 21st-century conditions.
The desperate rescue efforts of the past year make expanded regulation even more urgent. If the government is going to stand behind financial institutions, those institutions had better be carefully regulated – because otherwise the game of heads I win, tails you lose will be played more furiously than ever, at taxpayers' expense.
Both Henry Paulson and Ben Bernanke have warned that foreclosures will rise as more ARMs are reset to higher interest rates later this year and early in 2009. There are already 1.5 million homeowners in foreclosure and the new housing bill covers only about 400,000 of them.
Waiting for Housing Bill, ver. II, III, IV....
On a related note: the Institute for Women's Policy Research (IWPR, the best research and policy think tank on women and family concerns), headed by Dr. Heidi Hartmann, held a Congressional briefing, "The Female Face of Foreclousre: The Impact of Subprime Lending on Women", this past Friday in Washington. I'm eagerly awaiting a written report for a follow-up post on the foreclosure crisis and its impact on women. There's nothing available yet at their web site or at the Women's Data Center. Stay tuned...
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