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Paul Kiesel
Paul Kiesel
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Senate Approves Compromised Housing Bill

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The Senate Banking Committee approved legislation earlier today to help hundreds of thousands of homeowners in danger of foreclosure by expanding the availability of government-insured mortgages.

This bill is very different from the housing bill passed by the House last week, whereas this bill is suppose to provide less taxpayer risk. However, taxpayer risk is inevitable in both versions of a foreclosure rescue effort (it’s not like the Bush Administration hasn’t already put our tax dollars at risk over the last seven years). The Barney Frank housing bill, according to its specifics, will provide $300 billion to aid the relief of underwater mortgages and help provide financial remedy to borrowers facing foreclosure. Lenders will write down up to 15% of the principal balance on a loan, with the government backing the reformed loan itself. Critics of the bill oppose the plan saying that taxpayers would be taking a bulk of the risk. Rep. Frank said that $2.7 billion of taxpayer money would be at risk.

The Chris Dodd housing bill would create an affordable housing fund and provide Fannie Mae and Freddie Mac with $500 million annually for the next three years so that both government-sponsored mortgage buyers could go out and buy up “bad” mortgages. The New York Times reports that, “The Bush Administration, which previously said it would oppose legislation to rescue troubled homeowners, has suggested that it was willing to consider the Senate deal because lawmakers had found a way to eliminate any direct cost to taxpayers.” The key words there are “direct cost.” The Senate proposed bill, with Fannie and Freddie playing a big role, could still cost taxpayers, just indirectly, because if Fannie and Freddie need a bailout later this year (see A Trillion Dollar Risk) then it could potentially cost taxpayers much more than the risks attributed to the House bill (somewhere between a $500 billion and $1 trillion bailout for Fannie and Freddie, if their financial struggles continue).

Here is the Los Angeles Times’ analysis of the potential Senate bill and the condition Fannie Mae and Freddie Mac are currently in:

Analysis: Having Fannie and Freddie bear the cost of a new insurance program, and the risk of re-defaults on re-written loans, if that is the ultimate Senate plan, will probably satisfy some of the no-bailout crowd in Congress. But it loads those companies up with more risk, and marginally increases the chances that taxpayers will ultimately pay for Fannie and Freddie’s various mistakes and generosity. Relatedly, it’s not clear how Fannie Mae and Freddie Mac would use their earnings to pay for anything these days — they reported a combined $2.65 billion in losses earlier this month.

It’d be great to get a housing bill done either way, and to begin assisting troubled homeowners, but as you can see, many people in the White House have a proclivity to disagree about issues that are relative in nature; in this case taxpayer risk, which is prevalent in both versions of the House’s and Senate’s housing bill.