Is it a remedy for the worst housing slump the nation has suffered in decades? Or merely a taxpayer-funded bailout that will fail to reverse the plunge in home prices, the surge in foreclosures and the grave threat that overhangs the economy?
The housing act, which won final approval in Congress and which President Bush signed Wednesday, is historic in its sweep and ambition. It aims to provide relief to homeowners, incentives to buyers, guidance to lenders and oversight to mortgage giants Fannie Mae and Freddie Mac.
Who, really, will benefit and for how long? Will the legislation make a real difference for those who most desperately need help?
It depends on whom you ask. The act has plenty of fans. But skepticism abounds, too.
“The bill is not a silver bullet,” says Mark Zandi, chief economist of Moody’s Economy.com. “We have to string together several platinum bullets.”
Yet Zandi endorses the legislation as among the most important steps that can be done now to prop up the housing market.
But is it enough? Even if 400,000 homeowners can avoid foreclosure – a figure that a few critics dispute – some estimates put the number of potential foreclosures from 2007 through 2012 at up to 6 million.
“We’re not getting enough for our money,” says John Vogel, an adjunct professor at Tuck School of Business at Dartmouth. “Sure, some number of families – 100,000 or 200,000 – will be helped, and that’s not insignificant. But it will not address the problem as fully as we would have liked.”
Vogel notes that those in danger of foreclosure won’t benefit unless their lenders agree to reduce the balances on their mortgages; for the lenders, it’s purely voluntary.
Not since the National Housing Act of 1934 has legislation addressed a class as large as homeowners, without restricting the benefits to veterans, urban residents or low-income citizens. The 1934 law created the Federal Housing Administration and authorized the creation of Fannie Mae.
The question now is whether the current measure, sprawling as it is, will do what it’s designed to do and serve those it aims to help. Here’s a look at six groups that are intended to benefit.
HOMEOWNERS: $300 billion in FHA loans for refinancing
The bill would help an estimated 400,000 homeowners avoid foreclosure by allowing them to refinance into lower-cost mortgages insured by the Federal Housing Administration. To qualify, borrowers must have a relatively high level of debt to income, use their homes as primary residences and agree to share any profits from any eventual resale with the governme nt. And the lenders must agree to write down the loan principals.
HOME BUYERS: $7,500 tax break for first-timers
First-time buyers are already able to take advantage of low housing prices. Now, if they qualify, they can also receive a tax benefit of $7,500 or 10 percent of the home’s purchase price, whichever is less. (The income caps for the full benefit are adjusted gross income of $75,000 for singles and $150,000 for couples who file taxes jointly.)
LENDERS: FHA’s role could help shrink losses.
Lenders have taken a pounding as the mortgage market has deteriorated. Moody’s Economy.com estimates that financial institutions will lose $925 billion on assets originated through 2007 – including $525 billion in losses on mortgage loans. So far, financial institutions have announced write-downs of nearly $350 billion.
The American Bankers Association and the Mortgage Bankers Association say the legislation is a first step toward stabilizing markets.
Banks had a big hand in ensuring that under the bill, troubled homeowners could refinance into FHA-insured mortgages, so long as lenders agree to reduce mortgage principal.
FANNIE MAE AND FREDDIE MAC/TAXPAYERS: Treasury can spend billions for safety net.
The measure, for the first time, explicitly gives the government’s backing to Fannie Mae and Freddie Mac. The hope was to provide stability and confidence to the financial markets, which, the administration said, would help the overall economy. The Treasury has the power to rescue both companies, either through loans or by infusing them with capital.
The biggest winner in the bailout bill could be the mortgage market. Fannie and Freddie play a vital role in making sure there’s plenty of money in the mortgage market.
Any threat of their failure “could trigger a meltdown in credit markets that would make the movements in credit markets that we’ve seen over the last year look like a modest hiccup,” Lehman Bros. analyst Bruce Harting wrote in a note to clients. “Needless to say, the impact of a dislocation of that order could cause serious harm to the global economy.”
COMMUNITIES: $4 billion to buy, rehab foreclosed homes
The Center for Responsible Lending estimates that the second-hand effect of foreclosures on communities will result in a property loss of more than $350 billion for 40 million neighbors of foreclosed homes. The bill offers $4 billion for communities. Localities can use the money to buy homes at a discount and rehabilitate them. The homes are sold to low- and moderate-income families, with profits used for neighborhood development.
THE ECONOMY: Job market could eventually benefit
Stabilizing housing could eventually bolster the job market. Construction employment has fallen by 528,000 since September 2006. The jobless rate for Hispanics, heavily concentrated in construction, has jumped to 7.7 percent from 5.7 percent a year ago.
But even after housing stabilizes, tighter lending standards, coupled with lower prices, mean consumers won’t be able to easily use their homes as a piggy bank. As home prices soared in recent years, homeowners rushed to take out home equity lines of credit. But people who refinanced Freddie Mac-owned loans in the second quarter of 2008 pulled about $38 billion in equity from their homes, off from $79 billion in the same three months in 2007. Of those refinancing, 9 percent took out new loans smaller than their existing mortgages.
(Gannett News Service)
