Senate (again) reaches mortgage rescue deal

In talks led by  Democrat Chris Dodd of Connecticut (pictured), Senate leaders have reached another tentative agreement on a voluntary mortgage rescue fund that would not immediately use taxpayer money, The Wall Street Journal reports this afternoon. Reuters reported a similar deal last week.

The Wall Street Journal: "The top two members of the U.S. Senate Banking Committee said Monday they have reached an agreement on a housing aid package that includes a regulatory overhaul for Fannie Mae and Freddie Mac."

More: "The legislation combines the regulatory reforms for government-sponsored enterprises Fannie Mae and Freddie Mac with a proposal to use the Federal Housing Administration to offer up to $300 billion in federal guarantees to help refinance struggling borrowers into new mortgage loans.  One compromise proposal discussed last week would use the money from an affordable housing fund created from Fannie Mae's and Freddie Mac's earnings to help pay for the FHA guarantee program."

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.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP

Comments

[Rich]

I'm not surprised there are not comments yet on this one, since Senate banking committee news is mind-numbing stuff, but to take on the torrent of invective I expect to see against poor Chris Dodd, I'm going to offer up a perspective as one of Dodd's Connecticut constituents; the man is very bright, not stupid, and not corrupt. The reason why he and a lot of Democrats and even some Republicans in Congress are working on this is that THE MAJORITY OF THE COUNTRY IS NOT A BURSTING BUBBLE. There are vast portions of the country, including Dodd's state, my state, where housing prices are reasonable or even cheap in relation to income, but the local markets are still collapsing. Their constituents, believe it or not, are clamoring for action, and their Congressmen are listening. It's not all about California, folks. Those of you who are so angry about your bubble market fail to understand your fellow citizens who aren't living in the bubble; for the rest of us it's about availability of credit, getting communities through the tax losses, and heading off blight and social problems. As Solzhenitsyn put it, "a man who's warm can't understand a man who's cold"...

[JW]

This is nothing more than pure, unadulterated foolishness that will eventually pass on more debt to the taxpayers and make your $$$$ worth less. Fannie & Freddie are Govt.-sponsored entities so when they lose money, eventually the taxpayer loses. This also is another attempt to prop up housing prices in the bubble markets in order to keep more people from walking away from their homes.
Can all of you spell SOCIALISM?
And we pay these people to pass legislation? Disgraceful!

[Joseph...The Real Estate Guy]

Let the market correct itself...or if the people who created the mess want to fix it, they can do it.

But, could it be too late?

[JW]

Oh yeah.............In reply to Rich who commented about Sen Dodd................I forgot to add that I no longer live in SoCal, I'm now in South Carolina and I've never read any stories in the newspapers or heard one story on the television about anyone wanting the govt to bail out people who speculated or made bad choices in the housing market.
(I read the Greenville SC, Columbia SC, Atlanta GA and Charlotte, NC papers every day online as well as listening to several tv news broadcasts)
So, just where is this groundswell of voices asking for help coming from?

[Jack Heins]

This is a paper transfer of debt obligation, backed by more of Bush's worthless dollars that are guaranteed by our future Social Security funds, yet to be collected. It will let the mortgage holders off the hook and give the insurance companies a new page to tally the payments due, while raising the rates to cover their losses.
In the end, the taxpayers and general public will wind-up footing the bill. Remember the Savings and Loan fiasco during Reagan's administration?

[benjamin]

JW - This is socialism? WTF? Are you high or something? Socialism is when the government controls the means of production, WTF does this have to do with socialism? People who think like you have been so brainwashed that there is nothing the government can't do, other than invade foreign countries under false pretexts, that you don't call socialist. People like you have used this accusation so many times over and over again, that the word has lost any and all concrete meaning.

The government bails out corporate financial companies and no one runs around screaming socialism, nor does wall street and their tools on message boards cry for the market to naturally correct itself in those circumstances.

What we have here are the corporatists versus everyone else. These are people who have no problem with the government sloshing out the hog feed to corporations, but decry the end of the world and commie take overs the second the government attempts to do anything to help individuals.

Anyone who wants to let this market correct itself might be careful what they wish for. If this problem is allowed to "correct itself" it will be very long and protracted and will hit all your stocks and every sector of the US economy.

[Joshua Dobbins]

I listened to an incredible presentation by Ernest A. Almonte, the Auditor General of the State of Rhode Island at the AICPA Employee Benefit Plan Conference in Las Vegas NV last week, and whether we want to hear it or not, his message is true. Look at his congressional testimonies for more information. We the people of the United States of America need to put our houses in order, and stop spending more than we earn. The only way to solve the credit crisis is to start living within our means. Congressional bail-outs will not solve the problem, they will only temporarily treat symptoms of the problem.

[photty]

This will never be solved until we all agree that the root problem is that house prices are way too high. The easy credit with no down, interest-only loans and the belief that house prices would continue to rise tempted many into the housing market who cant afford to be there. Then there are the refinacers who drained the equity out based on inflated valuations, and spent the money, to rescue an economy drifting into recession. Then there are the speculators who saw poor returns from the stock market, and looked for an easy and safe return of 10% or better.
When buyers are so leveraged, even 100% in zero down caaes, there is no margin that will not wipe-out the mortgaged borrower....since the promised leveraged gains become leveraged losses in a downturn. Even those with good credit are walking away from loans.
Thanks Republicans for a deregulated mortgage market and thanks zealous Democrats for trying to encourage home-ownership for people with bad or no credit and even less income. What a mess. But dont dump your problem on Joe Taxpayer.

[Greg]

What irritates me, is I make almost 70k a year, and am just about debt free, but due to the dotcom bust earlier this decade, I spent a couple of years out of work which blemished my credit record. I can afford a house payment, heck my rent is probably more than a mortgage payment, and I cannot get a mortgage to save my life, and yet here's the government handing out money to people who can't afford to own a home or were too ignorant to understand what they were getting into when they financed.

It just blows my mind that my tax dollars go to bail out someone who bit off more than they can chew, and yet, I am not able to find financing to own my own home.

[Cal]

The devil is in the details I'll wait to read the bill until I can give an anlysis. My gut reactions:

Having a strong regulator for Fannie and Freddie will be a good thing but bad short term for the market.

Having the gov't getting involved in underwriting criteria for mortgages is stupid. The FHA knows what the FHA can and cannot do and what is safe underwriting.

Having poorly underwritten mortgages bought by highly leveraged institutions and the FHA insurance being help funded by the same highly leveraged institutions seems like a scheme that is destined to fail and the taxpayer will be paying for the whole thing anyways.

[steve miller]

Why are all you people hating california?
Look it's not that complicated, there are just a bunch of stated income loans over the conventonal limit.
We don't need a bail out from anyone, but that being said we need to be able to go to FHA or Fannie and get a fixed rate on stated income.
Look 6 months bfore Greenspan bolted he stated that anyone with a 30 yr fixed was throwing away money. He leaves and they yank the rug out from under stated income loans. 5 yrs never late with countrywide and they can't wait for each adjustment to my Arm. it's abunch of garbage that a person with perfect payment history can't get a fixed rate at say 5.5 or even 6. That's what our goverment should be doing is helping out poeple like me my wife my 5 children and the 45 poeple our business employs buy keeping us in our house. After droping my Kids off for school one morning I noticed a countrwide licensce plate frame on one of the biggest Mercedes ever made so I actually got the guy to pull over and we talked about my loan. He stated that he was on his way to give his resignation and that countrywide was not interested in helping anyone out except for the 300lb gorilla Mazillo or what ever his name is.

[Guy in tucson]

I like the idea of letting the economy correct itself. If someone didn't have the common sense to get the correct type of loan for their lifestyle that is their problem. I already have enough worrying about my own mortgage much less anyone else's. If we need to go into a recession, then so be it. I just acquired a large piece of property at a fair price, and it took a lot of planning, saving, and hard work to get here. I can't wait for the prices of surrounding properties (which are 10 times higher) to drop to where they should be.

[Jake in Salt Lake]

To Benjamin:

Japan's "lost decade" should remind us that government intervention doesn't really work and could actually exacerbate the financial malaise initiated by the US housing crisis.

The market should correct itself, and I am well aware that this means plenty of pain. But the alternative is worse. Undermining contract law and socializing losses by a tax payer funded bailout of Freddie Mac and Fannie Mae's losses will undermine the economy as a whole because it will weaken our currency and, as a result, inflation will accelarate. Inflation will cause capital flight, erode purchasing power, and restrict consumer spending. Not only will inflation rate accelarate, foreign governments will be more relectant to finance our deficit spending. The sudden financial shock of reduced spending due to a depreciating currerncy is more of a threat than the housing crisis.

Phoyy is absolutely right, the tax payer should not foot the bill for speculators or unwise borrowers. While there are multiple causes for the housing bubble, I'm surprised that the Federal Reserve's easy money policy hasn't been cited as a prime cause for this fiasco.

Bailout legislation such as that being touted by the Senator Dodd is an attempt to artificially keep the real estate and stock market from correcting itself, but it will end up only slowing the pain and probably doing more harm than good.

[Jim in FTL]

I just love how so many of you have such blanket answers for such complex problems. With out being insulting, would you think it through for a moment? Of course, people who were speculating and lost, so be it. But there are many out there who bought a primary residence with plenty of income to pay their mortgage. However, they also have an income tied to the housing market. Just about anyone in sales or a retail environment, insurances, etc, have lost a lot of income, and let me be clear ***much more than anyone would have guessed they would lose. Add to that the rising food and gas prices and now you have a homeowner who is upside down on his/her mortgage because of a correction far larger than anything in any of our lifetimes, they did nothing wrong fiscally, their losing income, prices are rising, and you say there is no reason to bail this person out? Who are you? That's not American. That's not the America I grew up in, and it is not the America we should hand to our children, because whether these people are bailed out or they lose to foreclosure, the government eats it. Countrywide isn't going under. The government will eat it. So do you want the house to go to foreclosure and drag the housing market down to the point where no one can move for a decade, or do you want a bailout for the hard working tax payers who did *nothing* wrong and simply need some help. That will be far less expensive than a Countrywide bailout. So like I said, think it through before you take sides.

[JW]

For the benefit of Benjamin:

Socialism:
Any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy.

[arroyogrande]

Rich : "as one of Dodd's Connecticut constituents...vast portions of the country...constituents, believe it or not, are clamoring for action...for the rest of us it's about availability of credit, getting communities through the tax losses, and heading off blight and social problems."

OK, I'll bite, Rich.

What problems do Connecticut home buyers have in getting credit? Are mortgages unavailable? Are interest rates unbearably high? Are banks requiring a 50% down payment? Do you have to have an 800 FICO score in order to borrow? I'd like to know what sort of onerous loan provisions Connecticut borrowers are facing.

Also, "getting communities through the tax losses"? How much have house prices deteriorated in Connecticut if you 'didn't have a bubble'? Aren't property taxes at least equivalent to 2005? Why is there a loss in taxes?

Lastly, why would you have blight and social problems? If you had no bubble there, I would assume that people in Connecticut could actually *afford* there homes, unlike many here in California that used teaser rates, pay option ARMS, I/O loans, and stated income as "affordability products". Why would foreclosure rates (and thereby presumably social problems and blight) increase in a non-bubble area like Connecticut if you guys made reasonable and prudent financing decisions when buying a home (again, unlike many in California)?

I'm interested to know.

- arroyogrande

[Robert in Palm Springs]

First, I would like to make a comment to Rich in Connecticut. While your real estate prices may not have risen as much as California’s, CT RE is not cheap and has gone up in price. A lot of hedge fund managers have massive properties in your state and in some markets have driven up prices considerably (these are the bastards largely responsible for all this insanity).

I am hesitant to embrace your image of the poor family in CT though no doubt there are some there who are in duress. In the end, it doesn’t matter. Bubble or not, if someone is in financial duress because they spent money they didn’t have or more than they could afford, it is their responsibility to fix it, not mine, yours or the government’s.

Our government ignores the hidden obvious and instead focuses on gimmicks and sound bites. Our financial system is seriously broken. Fundamental changes are needed. Here are a few things that might help: (1) regulate the Fed and the financial markets by demanding transparency and reforming markets that are broken (aka get the crap out of the system and let the losers take their losses in broad daylight), (2) quit spending money like drunken sailors, (3) start a meaningful campaign to create high paying jobs in this country, (4) fix our infrastructure instead of Iraq’s, (5) tell us the truth by using statistics that are accurate rather than manipulated by using idiotic concepts like the birth/death model in calculating unemployment, (6) work with private industry to move us away from being a consumer society, and (7) stop advertising prescription meds on TV (this is why our health costs are so high; everyone is, in fact, on drugs).

Throwing money at the home RE market is futile. It will not work; the damage to the system is to great and it does nothing to deal with the real issues. Get to the real job you lazy @$&%*@$s!

Enough! I’m fed up. It’s time for a cocktail. Who cares if it’s Monday.

[Mauricio Mendez]

Will Freddie and Fannie insure loans above the current value of the property and if so, how much higher? Home values have dropped off a cliff in many markets, California, Nevada, Arizona, Florida. In many cities and towns in these states the drop has been more than 30%. So, am I to understand that the 300 billion Senate Bill will be to make new loans insured at 110-130% of the value of the property? No one is that stupid and if they are not insuring above the value, then the desperate, clueless homeowner and the greedy lenders will continue in a bind. Foreclosures will continue at a new record pace and both Freddie and Fannie will have $300 more billion to waste.

[Laker]

Rich,
If what you're saying is true and markets that did not experience bubble are falling 5% and that is creating a need for a bailout, than we in California are heading for a super duper deep depression 10 times worse than the great depression....
Obviously you are full of it. Dodd is either a fool for not understanding that you can't keep the housing inflated without support from fundamentals. Or, Dodd is corrupt and being paid by NAR/HAHB, etc. Only those two options.
For markets that never seen a bubble, there is no harm in prices to go down 5-10%. They can't get any lower since, they never got 300% higher.
Here in California, prices went up 300%, that is no problem if they get down 50%...
Show us all those people that are in favor of rewarding greed, speculation, or rewarding losses in the Casino.

benjamin ,
you and your twin shockg are both sitting in the same boat. Since you are so desperate for a government bailout, i guess you are on the verge of losing your home to foreclosure. Guess what, either you could not afford it in the first place, or you pull to much cash out for imaginable quity that you never had.
What do you want me and the rest of us to pay your bills??? Would you like pay mine? BS!

[arroyogrande]

"He leaves and they yank the rug out from under stated income loans."

The problem is that way too many people used "stated income" as a way to get into loans that they normally would never qualify for...and since "house prices always go up", the banks and brokers didn't care, or in some cases, encouraged the practice. That's when we heard of stories of people that only really made $40,000 a year qualifying for $800,000 houses.

I'm not quite sure what "stated income" *is* good for as I always thought that you can just go through a little more trouble and go "full doc" like the rest of us...dig up the prior year tax returns, etc. I realize that many people "enhance" their tax returns with business write-offs to save on paying taxes, and then claim that their tax returns don't show the "true picture" of what they earn., and that's why they need to go "stated income". If that's so, then aren't you lying to the IRS, or lying to the Bank, so that you can pay less taxes AND qualify for a bigger mortgage? Kind of like keeping two sets of books, one for the tax man, and one for the loan officer? I've always wondered about that.

- arroyogrande

[E]

LOL

I knew this would bring some interesting people out.

Lets see...we've got a poster from Connecticut that says there was no bubble in his state.

Yeah...right...sure.

Then we have the "be careful what you wish for crowd"

And...we have some guy who thinks that the government should help him and his FIVE children.

Five children? Damn...we need a Chinese style zero population growth law in this country...the only help these kinds of breeders need from the government is subsidized sterilization.

And finally the if you're not for the bailout you are "Anti-American...and a meanie".

Sorry, Debt-junkies...it's time for rehab.

[Nelcisco]

it sounds like subprime borrowers that are in trouble will be able to do an FHA refi.

[td]

E! funny post. finally some one who "gets it" and has a sense of humor.

[Arti]

I BOUGHT TOO MUCH HOUSE AND TOOK THE EQUITY OUT IN CASH OUT REFI TO BUY MY SUV AND PLASMA, AND NOW I'M BEING TOLD I MUST PAY FOR ALL THAT!!! PLEASE HILLARY AND DODD AND FRANK BAIL ME OUT NOW.

[Laker]

Jim in FTL wrote: "...Add to that the rising food and gas prices and now you have a homeowner who is upside down on his/her mortgage because of a correction far larger than anything in any of our lifetimes... prices are rising, and you say there is no reason to bail this person out?....and it is not the America we should hand to our children...."

Jim in FTL,
Please put things in order. First there started a healthy correction in house prices. Helicopter Ben saw that this thing will harm Wall street so he started to slash interest rates. That thing, slashed the dollar value, and with simply ECON 101, you need more devalued dollars to buy same food and gas. Had the FED kept rates at 5%, there would be no inflation in food and gas would still be in the $1.50-2.00 range.
You are talking about America to leave to our children???
ARE YOU suggesting that we need to bankrupt the country and put all the debt created to bailout all the speculators so that our children will foot the BILL???
That is what you wish for our children...you sound more like Billary now. If you care about our children and about good Americans, don't let them pay YOUR or the other fool's bills.

Plus if needed the $300 billion will come out of Ferdie and Fannie's profits, then, there is ZERO 0, chance that they will fund that, since they have lost more than $2 billion last quarter, and are due to lose even more as we proceed with the bad loans still due....