May 23, 2008

May 23, 2008 | Commentary on

The home-liest bill yet

Congress continues grabbing every opportunity to expand government, while missing golden opportunities for reform. Witness its recent handiwork:
  • Bailouts of mortgage lenders.
  • Higher taxes (often hidden in other legislation).
  • Defense bills focused more on pork than on the military.
  • Energy bills that make us more dependent on foreign oil and dictators.
  • A farm bill that is more about growing corporate subsidies than growing crops.

It's sadly fitting that Congress keeps passing giveaway bills that undercut personal responsibility. After all, Congress seems incapable of acting responsibly itself.

The mortgage bill is all too typical. It helps big mortgage lenders more than borrowers - and then tops it off with lots of extra money for special interests. The bill boosts funding for public housing, but what does expanding public housing have to do with the mortgage market? Why does it create a permanent grant program benefiting left-wing activist groups such as ACORN?

Homeowners in trouble don't get help unless their lender decides to seek a government bailout. By setting a precedent of rewarding irresponsible behavior, Congress guarantees that we'll get more of it. As a Wall Street Journal article put it, we can look for "a concerted effort by mortgage investors to get their worst customers into the government plan, which would pay 85 cents on the dollar for mortgages now selling for 50 cents or less."

The Federal Housing Administration, which is to administer the program, can be expected to hire hundreds - perhaps thousands - of new government workers to do the job. Although the direct annual cost is supposedly "only" $500 million a year to pay for administration, taxpayers will be liable for $300 billion of loan guarantees. Since it will guarantee risky loans that no private lender wants, a higher-than-normal default rate is to be expected.

The bill has only speculative provisions of how to handle major losses. And where will the FHA get the extra $500 million annually to pay the overhead? A Senate change to the bill substitutes a fee on certain mortgages rather than using existing taxes. Fees would be assessed when Fannie Mae and Freddie Mac acquire mortgages - and they currently acquire about 80% of all mortgages in the country. That fee will be tacked onto all those financial deals, so millions of homeowners will get nipped to fund the combined bailout and new housing subsidy program.

This fee is intended to balance special advantages Fannie Mae and Freddie Mac currently receive. Nothing wrong with that. But the proceeds should not be used to pay for a liberal special-interest project. Unfortunately, the fees will flow into the federal treasury and right back out to a new low-income housing fund - leaving nothing to help pay off the bad loans they'll be picking up.

Not everything in the bill is bad. Long-overdue reforms are dictated for Fannie Mae and Freddie Mac, which for years have received special benefits from taxpayers without being held accountable. But the reforms could have been done without linking them with the mortgage bailout program.

We're told the bailout program will last only a couple of years - but the $500 million fee assessment will go on forever. Where will the money end up? In a new "National Affordable Housing Trust Fund" that will send the money to states, communities and private groups as federal grants to "improve" low-income housing.

Of course, we already spend around $25 billion annually on federal housing subsidies for almost 5 million families. But a strong coalition of left-leaning groups has been clamoring for Congress to put more money into the effort - and channel the money through their organizations as part of a new housing program. One of the groups, the National Low Income Housing Coalition, complained in a press release that putting $500 million a year into the mortgage bailout program was "diverting" money that NLIHC felt should be going to its programs instead.

The mortgage bill is typical of the legislation moving through Congress this year. Whether it's jamming billions of pork spending into critical defense bills, raising a bumper crop of bigger farm subsidies, expanding food stamps, or pumping up the ethanol giveaway, Washington suffers from an irresistible impulse to play Santa Claus.

President Bush has wielded his veto pen several times this year. The housing bill looks like a great reason for him to wield it again.

Ernest Istook is recovering from serving 14 years in Congress and is now a distinguished fellow at The Heritage Foundation.

About the Author

Ernest Istook Distinguished Fellow
Government Studies

First appeared in Human Events