 Congress has enacted recently legislation to resolve the worst housing crisis since the Great Depression. This will be the government’s greatest effort to stabilize the mortgage and financial markets. The dice have been rolled for the fate of 300 million Americans.
The legislation has several key features: $300 billion program to refinance loans for struggling borrowers Dramatic rescue plan for embattled mortgage finance firms Fannie Mae and Freddie Mac. Creation of a new regulator for these Government Sponsored Enterprises Increase in the federal debt limit to $10.6 trillion Reform the Federal Housing Administration.
Wall Street Journal in an article July 24, 2008, “Housing Bill Will Extend Federal Role in Markets” highlighted the costs and expanded scope of the federal government. Tax Credits for first-time home buyers: $4.6 billion FHA insurance for up to $ 300 billion of home loans: $729 million Raised loan limits for FNMA and Freddie Mac to 115% of local area median home price, up to $ 625,000 Raised limit on federal debt to $10.6 trillion from $9.8 trillion Bill eliminated seller-funded down-payment assistance for loans backed by FHA. FHA has lost billions to date under this program
Ironically, twelve months ago, there was almost universal confidence in the American housing market as well as the public and private institutions that supported it. Alan Greenspan waxed enthusiastically about the rising percentage of American homeowners. He rebuffed critics. The past twelve months have been sobering. In April 2008 former Secretary of the Treasury Lawrence Summers predicted in testimony to a Senate Committee that What shattered the foundation of the American housing industry?
Housing Prices Can Decline!
On a national basis, until the last twelve months house prices had not dropped since the Great Depression. The National Association of Realtors reported that for the month ending June 2008 prices dropped 6.1% from one year ago.
Only a few critics recognized that Fannie Mae, Freddie Mac and the Federal Housing Administration, the supposed bulwark for our housing market were in dire financial straits themselves. Over the past thirty years, these institutions have become the dominant players in providing money or insurance for home mortgages. Specifically, Fannie, Freddie, and the FHA in the second quarter of 2008 accounted for 90% of the United States home mortgage origination. They either hold or guarantee $5.3 trillion of mortgage debt, covering about half the outstanding mortgages in the U.S. Democratic leaders such as Representative Barney Frank, the House Financial Services Committee chairman, and Senator Christopher J. Dodd, the Senate Banking Committee chairman feel that the best solution to our present crisis was the establishment of a new regulator for Fannie Mae and Freddie Mac and pouring billions of dollars into these institutions. Senator John McCain questions whether Fannie and Freddie can be effectively regulated. He wrote an editorial dated July 24, 2008 to the St. Petersburg Times “Take taxpayers off hook for rot at Fannie, Freddie.” McCain wrote that Americans should be outraged at the latest sweetheart deal in Washington. Congress will put United States taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It's a tribute to what these two have bought with more than $170-million worth of lobbyists in the past decade. With combined obligations of roughly $5-trillion, the rapid failure of Fannie and Freddie would be a threat to mortgage markets and financial markets as a whole. Because of that threat, I support taking the unfortunate but necessary steps needed to keep the financial troubles at these two companies from further squeezing American families. Paul Gigot the editorial page editor of the Wall Street Journal argued in an editorial on April 21, 2008 “Too Political to Fail” that Fannie and Freddie have been able to purchase political immunity for decades by disguising their vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street even after overstating earnings by tens of billions of dollars.
In conclusion, we need to question whether American home ownership is best served by the market place or creating institutions “too big to fail” that have a taxpayer safety net. Hopefully, we have not resolved our current housing crisis by sowing the seeds of the next. PUBLISHER'S NOTE: Remember how the Democrats, when they took control of Congress in 2006, pledged to get us out of the war in Iraq, cut the deficit, restore confidence in America, eliminate "ear marks", bring transparency to Congress, stop the strangle hold of lobbyists, and make our lives easier? Since Democrats took control in 2006 we have seen a housing market bust, a financial market meltdown, rising food and fuel prices, oil over $140 a barrel, a dollar in decline, Congress with a 9% approval rating, more inaction than action, and for the first time in history declining housing prices as noted by Doc Werlin. I have heard more and more people express outrage over bailing out banks, Fannie and Freddie. What do you think?
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