Sunday, June 29, 2008
Editorial: A housing adjustment
Congress seems headed toward a compromise that would ease the foreclosure crisis but stop short of a federal bailout.
From the RoundTable blog
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Washington is nearing a compromise on legislation to staunch the nationwide housing foreclosure hemorrhage, and skeptics are crying foul:
Why help homebuyers who foolishly overextended themselves? Even more, why help the banks that encouraged the buyers with soft promises of adjustable rate mortgages that could always be refinanced before they go up? Ha.
The disgust is understandable because it is well earned.
Yet, in the face of the sharpest housing slump since the Great Depression, Congress is compelled to act. Reports last week showed housing prices nationally in April more than 15 percent below last year and consumer confidence in a free fall.
As the impact of the housing slide continued to reverberate through the economy, even the Bush White House signaled it was heading toward compromise.
Any hint of a bailout will be galling to homeowners who chose to plod the safe path of fixed-rate mortgages and the slow, careful buildup of equity in their homes. The compromise the Senate is crafting, though, falls somewhere between a federal bailout and letting the market sort itself out.
Lawmakers are still working out the details, but the broad basis of the Senate's plan seems likely to survive when the House and Senate reconcile their bills:
n The Federal Housing Administration would guarantee new, more affordable, 30-year fixed-rate loans to homeowners facing default, leaving taxpayers to assume the risk.
n Lenders would have to cut the principal balance of loans at risk of default to about 85 percent of a home's current value -- taking a substantial loss, but probably less than on a foreclosure.
n Homeowners wouldn't automatically qualify. First, their lenders would have to agree. Then borrowers would have to show they had enough income and creditworthiness to afford the new loans. They also would have to pay a hefty fee.
n Only borrowers trying to stay in their primary home would be eligible.
If troubled borrowers and lenders participate in high enough numbers, the payoff for taxpayers would be the stabilizing effect on an economy being battered by, among other things, a national housing market sinking under 8,000 foreclosures a day.
The legislation also includes provisions to avert future crises. Among the provisions:
n Tighter regulatory oversight of Fannie Mae and Freddie Mac, the government-sponsored financial giants that buy mortgages from lenders.
n Stricter disclosure rules for lenders, who would have to tell borrowers plainly the maximum monthly payment they would have to make with an adjustable rate loan.
Even the reforms are not likely to sweeten this deal for taxpayers unaffected by the wave of foreclosures. But their numbers will go down as the effects ripple outward.
