- The Washington Times - Thursday, May 29, 2008

ANALYSIS/OPINION:

With nominal prices for existing homes nationwide down more than 14 percent in the first quarter compared to a year earlier, a Senate Banking, Housing and Urban Affairs Committee recently voted 19-2 to approve a housing bill that represents some improvement over unacceptable housing legislation passed earlier this month by the House (266-154) with the support of 39 Republicans.

In addition to modernizing the Federal Housing Administration (FHA), both bills include long-overdue regulatory changes involving Fannie Mae and Freddie Mac, the scandal-plagued, under-capitalized, multibillion-dollar-loss-incurring government-sponsored enterprises that hold or guarantee more than $5 trillion in U.S. home mortgages. Those are positive steps.

Compared to the bill passed by the House, the legislation approved by the Senate committee would reduce taxpayer exposure to the cost of government bailouts of borrowers whose speculative or irresponsible activities have resulted in substantial losses of home equity. In countless cases, many of these irresponsible people bought homes they could not afford, withdrew huge amounts of home equity through cash-out refinancings or took out large home-equity loans to finance consumption binges. These people do not deserve a bailout at taxpayer expense.

Both bills would establish a voluntary program for lenders and borrowers. To avoid the costs of foreclosure, a lender would have to accept about 85 percent of the current appraised value of the home. (A lender who is owed $250,000 on a mortgage for a house that is appraised today at $175,000 would have to take a voluntary haircut of more than $100,000 in order to collect the less-than-$150,000 balance of the debt.) The irresponsible borrower would receive a new, FHA-insured, fixed-rate mortgage equal to 90 percent of the value of the home, obtaining instant equity of 10 percent irrespective of how many cash-out refinancings he had taken.

The program would authorize the taxpayer-backed FHA to guarantee up to $300 billion in new, fixed-rate mortgages. The unacceptable House bill would expose the taxpayer to any losses not covered by fees collected by the FHA. At least for the first year, the Senate bill would finance the projected costs of the bailout by diverting 100 percent of the funds from a newly created affordable-housing trust fund. Within two years, however, only 25 percent would be diverted from the trust fund to the FHA program. We fear that taxpayers would then be forced to bail out irresponsible borrowers. And that is not acceptable.

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