Congressional 'compassion' with your money

COMMENTARY Government Regulation

Congressional 'compassion' with your money

May 9th, 2008 4 min read

Former Distinguished Fellow

Ernest served as a Distinguished Fellow at the Heritage Foundation.

Even for Congress, $330 billion is a lot to give away. But the House of Representatives is managing that this week, passing companion bills that put taxpayers on the hook to give away that much to those struggling with mortgages - miscreants and victims alike.

They proved that the mortgage mess hadn't gotten so bad that Congress can't make it worse.

President Bush says he's ready to veto the bills. But Democrats are unified behind the measures and a number of Republicans have thrown in with them, so veto threats may vanish in a cloud of compromise.

Many Republican defections are driven by politics, not policy. For example, Rep. Ginny Brown-Waite, R-Fla., justified her support for the bailout by stating that opposing it "will hurt her party's image with voters concerned about the economy." She added, "I'm the compassionate conservative here."

Such compassion isn't cheap. On the line are federal guarantees of loans that private lenders decide aren't worth the risk - $300 billion worth.

But wait, there's more! States and cities would get $15 billion in grants plus another $15 billion in interest-free loans for "housing stimulus activities." That would enable them to buy homes in foreclosure, fix them, sell them, or rent them out to low-income families. In other words, they could convert a foreclosed house in any neighborhood into public housing, bypassing the usual public notice and hearing requirements typically required for public housing.

The bigger $300 billion part is what The Heritage Foundation's David John describes as "a government buyout of problem mortgages disguised as a refinancing plan."

Naturally, it would significantly enlarge the federal bureaucracy, requiring the Federal Housing Administration, or FHA, to hire hundreds of new workers to handle massive red tape - and probably requiring months to train them and get under way. The only "immediate" relief is for the politicians who posture as champions of the little guy.

Sponsors first claimed 2,000,000 homeowners would be helped. Then they dropped that to 1,000,000. Then to only 500,000. So who knows what number we'll hear tomorrow!

All we can predict with certainty is that hard-working taxpayers would be stuck with a lot of bad loans. The Big Boys of Finance will benefit big-time, because they can move the problem loans off their books and into the taxpayer-guarantee program. The more-secure loans would never go into the bailout program, because the lenders - not the borrowers - would have power to decide when to enter the bailout program.

Rep. Mike Pence, R-Ind., called it "an extraordinary bailout for Wall Street - disguised as relief for homeowners."

As the Bush administration wrote to Capitol Hill, "The requirements to write-down a portion of the principal balance and to waive prepayment penalties by existing lenders will likely result in only the worst loans being approved by servicers to participate in the program." Talk about adverse selection! Taxpayers will wind up backing only the loans least likely to ever be repaid.

The administration says the plan is excessively risky for taxpayers and could bankrupt the FHA. The bill's author, Rep. Barney Frank, D-Mass., claims that bill would not be expensive because it only authorizes $300 billion in loans, and won't necessarily lose that full amount. But the Congressional Budget Office estimates that one-third of the new federally insured mortgages would generate a claim, with taxpayer money needed to pay them.

As the official CBO analysis states, "The cumulative claims rate (default) for the program would be about 35 percent and ... recoveries on defaulted mortgages would be about 60 percent of the outstanding loan amount. Those rates reflect CBO's view that mortgage holders would have an incentive to direct their highest-risk loans to the program, and are based on the expectation that the underwriting standards established for the new program would be less restrictive than those currently in place for FHA's single-family loan guarantee program, thereby allowing FHA to insure loans with a greater risk of default."

All taxpayers would pay for assuming this risk. But no help would go to the 100 million-plus Americans who rent or who have paid off their mortgages. Nor to the vast 95 percent or so majority of mortgage holders who are not delinquent.

Rep. Spencer Bachus, R-Ala., noted that 54 million American households make their mortgage payment each month; another 34 million pay rent; and 25 million have paid off their loans. Yet they have financial struggles, too, such as with sky-high energy and gasoline prices. Bachus said, "Let's not take from them and reward lenders who unwisely extended credit. The guarantee doesn't go to borrowers; it goes to lenders." Many of them, he said, are speculators on Wall Street who bought high-risk, speculative packages of mortgages and now they want to transfer their loss onto the government: "The lender can choose which loans he'll offload on the federal government ... and he'll offload his bad ones."

The benefits would also be focused on only a handful of states. An analysis by the Wharton Business School's Todd Sinai determined that 40 percent of the benefit would likely go to lenders and investors in California, Florida and New York, whereas 40 states with lesser rates of subprime mortgages would collectively get only 36 percent of the assistance.

Admittedly, there's more to the legislation than mortgage bailouts and giveaways to states and cities. There are also giveaways to some very left-leaning groups, showering them with taxpayer money to "counsel" those having financial difficulties. The National Urban League, the Raza Development Fund, the Housing Partnership Network and the National Community Renaissance Program (National CORE) will pocket $25 million apiece. And even more money would be extracted from key lenders Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. They would be required to contribute 1.2 cents per $100 of the value of their mortgage portfolios to support the low-income-housing activities of leftist nonprofits like ACORN and La Raza.

Another flaw is that the measure only pretends to bar illegal immigrants from receiving the bailouts. A key amendment to require proof of identity was conveniently blocked.

But avoiding a really bad bill is no guarantee that we won't get stuck with a not-quite-as-bad bill. President Bush told reporters yesterday that despite his intent to veto the House-passed package, nevertheless, "we are committed to a good housing bill that will help folks stay in their house, as opposed to a housing bill that will reward speculators and lenders."

The underlying problem is that the federal government has already made too many bailouts, and they're now used as excuses for another. Rep. Al Green, D-Texas, recited to his colleagues a litany of what he labeled historical federal bailouts, ranging from Chrysler to Continental Illinois to Bear-Stearns as a justification for this latest one. He was wrong that one bailout justifies another, but he was right that one bailout leads to another.

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

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