The most sweeping housing bill Congress is likely to consider this year passed the Senate Friday as house price woes persist in much of the United States and mortgage giants Fannie Mae and Freddie Mac stagger from foreclosure losses.
Despite the atmosphere of urgency, the housing legislation still faces an uncertain future. House leaders want some significant revisions – and the White House has threatened to veto the bill in its current form.
The housing bill easily passed the Senate 63 to 5 in a rare Friday afternoon vote.
The bill's centerpiece is a provision that would allow the Federal Housing Administration (FHA) to provide up to $300 billion in new, affordable fixed-rate loans intended to help struggling owners stay in their homes.
Lenders would have to agree to absorb a loss of 15 percent on individual mortgages covered by this program. In return, they would be guaranteed to receive at least some money, while avoiding a foreclosure – an action that by itself can cost as much as 40 percent of a home's value.
Borrowers would have to pay a small annual insurance premium. If they made a profit when they eventually sold their home, the FHA would get a slice of the money.
According to the Congressional Budget Office, this program would probably help about 500,000 homeowners over the next four years.
"The housing bill helps out a specific group of people. That's good to do – it's good value," says Mr. Elmendorf of Brookings.
But some critics note that given the scale of the problem, 500,000 loans spread over four years is a relatively small number. Lenders made foreclosure filings on 252,363 US properties in June alone, according to RealtyTrac's US Foreclosure Market Report. That's more than a 50 percent jump from the comparable number of June 2007.
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.
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.