Senate approves aid package for troubled mortgageholders
But obstacles – including a Bush veto – could stymie the legislation.
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Plus, many of the mortgages refinanced under the prospective FHA program might be liable to fall into default again, says David John, an economist specializing in government programs at the Heritage Foundation in Washington. The Congressional Budget Office estimates that up to one-third of the refinancings will subsequently fail.Skip to next paragraph
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The FHA financing provision "is not going to help that many people, will be expensive, and really will bail out bad lenders rather than homeowners," says Mr. John.
The Senate housing bill would also create a new regulator and tighter controls for Fannie Mae and Freddie Mac, the twin government-sponsored mortgage-finance giants.
Fannie's and Freddie's share prices have plunged and their borrowing costs have sharply risen as investors have come to believe that defaults and falling home prices will cost the firms far more than the $11 billion loss they already have incurred.
A strong regulator who had required Fannie and Freddie to maintain a better capital position "might have made a difference" and helped the firms avoid the current crisis, says John.
Democratic leaders in the House have said they want to make small but important changes in the housing bill before their chamber votes its approval.
The Senate bill, for instance, calls for the new regulator to immediately start overseeing Fannie Mae and Freddie Mac. House Financial Services Chairman Barney Frank (D) of Massachusetts says that should be delayed by six months to allow time for the government officials involved to develop regulations and properly get up to speed.
The House wants to raise the limit on the size of loan the FHA may insure from $625,000 to $730,000. Perhaps most importantly, a group of conservative Blue Dog Democrats oppose an extra $3.9 billion shoehorned into the bill to buy and rehabilitate foreclosed properties.
It's the cost, not the activity, that the Blue Dogs oppose. They say this $3.9 billion is not offset with savings elsewhere and that it would simply swell the federal deficit.
The White House also has singled out this extra $3.9 billion, calling it a bailout for irresponsible lenders and saying that President Bush may well veto the whole bill if it is not removed.
Any FHA modernization effort, says the Bush administration, should also include a ban on any seller-funded down payments.
"Congress should quickly pass responsible legislation modernizing the FHA," said a White House July 1 analysis.