A bitter pill we may have to swallow

The Senate has passed its housing bailout bill; the House is about to; and the White House has agreed to go along.

The Senate bill, likely to be the template for the final bill, is terribly unfair, perhaps inevitably so. For a start, why are people whose homes are in, or in danger of, foreclosure now entitled to help unavailable to people who lost their homes in less excitable times?

Also left on the outside are homeowners who have struggled successfully to stay current on their mortgages and lenders who were careful about whom they lent to.

The Senate bill has $25 billion in tax breaks for lenders and homebuilders. The Senate gives a $7,000 tax break to the buyer of a foreclosed house, giving the bank that’s selling it an advantage over the seller next door who just wants to move.

The House would give a tax credit of up to $7,500, repayable over 15 years, to first-time homebuyers and it’s fair to ask whether it’s good policy to entice these buyers into a market that’s still falling. One source of the current housing mess is houses whose value fell below the amount still due on the mortgage.

The biggest piece of the final package is likely to be $300 billion for the Federal Housing Administration to underwrite refinanced mortgages. The mortgage companies would take a loss on the existing loan but not as much as if the house went into foreclosure. The homeowners, in turn, would have to demonstrate they can keep up with the new payments on the refinanced loan. The danger is that the taxpayers might find themselves on the hook for the loan companies’ worst performing loans.

The most effective provision — and the most dangerous in terms of precedent — is not in the Senate bill and will not be in the House bill either. That would allow bankruptcy judges to rewrite the terms of mortgage agreements. There is risk in allowing the government to rewrite voluntary contractual agreements where the risks and rewards to each side are presumably balanced.

The lenders say that provision would drive up interest rates. The Democrats say that unless progress is made in curtailing foreclosures they’ll bring it back next year. This bill, unfair as it is, better work.


  1. geb353

    Just don’t regulate banks and S & L’s in any way.
    Bail ’em out whenever they need it [with our tax money], but
    don’t restrict their ‘creativity’.
    I figure they can repackage these stiff loans and do it all over again in 2 or 3 years, when the brain-dead public has forgotten about it.
    BTW – does anyone recall the S & L collapse a couple decades ago?
    Remember how much it cost to fix?

  2. geb353

    The U.S. Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in what economist John Kenneth Galbraith called “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.”

    [1] The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government — that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts– [2], which contributed to the large budget deficits of the early 1990s.

    The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses. [3]

    The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession.

    Between 1986 and 1991, the number of new homes constructed dropped from 1.8 million to 1 million, the lowest rate since World War II.



    Although the deregulation of S&Ls gave them many of the capabilities of banks, it did not bring them under the same regulations as banks. First, thrifts could choose to be under either a state or a federal charter. Immediately after deregulation of the federally chartered thrifts, the state-chartered thrifts rushed to become federally chartered, because of the advantages associated with a federal charter. In response, states (notably, California and Texas) changed their regulations so they would be similar to the federal regulations. States changed their regulations because state regulators were paid by the thrifts they regulated, and they didn’t want to lose that money.

    Imprudent real estate lending

    In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1976 $700 billion; 1980 $1.2 trillion)[citation needed]and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the FDIC and the Resolution Trust Corporation, stated, “The banking problems of the ’80s and ’90s came primarily, but not exclusively, from unsound real estate lending.” [5]

    Keeping insolvent S&Ls open

    Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, Congress sought to change regulatory rules so S&Ls would not have to acknowledge insolvency and the FHLBB would not have to close them down.