The other foreclosure bailout bill, and why it's a bad idea

The Barney Frank mortgage rescue bill got all the big headlines today, but the House also passed a more straightforward bailout bill: Rep. Maxine Waters' bill  to give local governments $15 billion to run out and buy foreclosed houses.

Waters: "This bill provides effective and meaningful help that is targeted, timely and temporary.... First, this bill targets assistance where it is most needed.  The $7.5 billion in grants and $7.5 billion in loans would be allocated to states based on the number of foreclosures and the number of subprime loans 90 days delinquent and then adjusted to account for median home price. Second, the bill put funds 'on the street' quickly enough to stimulate the economy."

More on the bill, from the Congressional Research Service: "Limits the use of such loans to: (1) purchasing or financing the purchase of qualified foreclosed housing for resale as housing for homeownership to families having incomes of up to 140% of the median income for the area in which the housing is located; (2) rental of such housing only by families whose incomes do not exceed 100% of such median income in the area; and (3) rehabilitation of such property for the purpose of reselling it within three months at a price as close as possible to its acquisition price."

I've written before that this a bad idea. Foreclosed houses will sell at the right price. If they're not selling, the price is too high. Giving local governments money to buy houses is a sweet deal for lenders -- they get a willing buyer with cash who is also a clueless negotiator.  And do you really trust your government to go shopping for bank-owned properties without playing favorites? Do you trust your government to inspect, remodel and sell or rent a bunch of broken-down houses in a timely and cost-efficient manner?

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: U.S. Rep. Maxine Waters (D-Los Angeles), by Getty Images.

Comments

[tew]

Note too that the median income limits do the following:
1) Create a de facto tax on higher income people, since they are frozen out of the government largesse (which their taxes paid for).
2) Create more opportunities for fraud by a) allowing people with unreported (under the table) income to qualify and b) allowing families to shift assets around so that various members get low income treatment even if the family is relatively wealthy and c) MANY OTHERS.

[Jonah LaFollette]

What a dumb bill...when are these government officials going to let the market correct itself? Can someone also tell the Fed that there are buyers out there (I'm one!) but they are just priced out of the market!

[Rob]

Why this freak show is still in office, just boggles the mind. Even my liberal friends cringe when she speaks.

Free hand outs for everybody!

[jb]

It is time that we run her out of office. I called her office

Congresswoman Maxine Waters
10124 South Broadway
Suite 1
Los Angeles, CA 90003
Phone: (323) 757-8900

a very nice lady on the phone listened to my complaint (I told her I was going to the dark side, aka republican, over this issue and would do everything i can to get maxine and others that support a bailout out of office).

time for her to go (from what I here from others, it is past time... lets get her out!)

[Fred]

How are our elected officials so ignorant? I mean is this simple lack of education, or the willful neglect of the "right thing" in favor of something more politically attractive? I'm as much of a New Deal Democrat as anyone, but in this case, the free market needs to work itself out. Propping up prices is bad for our economy and nothing but a temporary roadblock anyway. The prices will come down anyway, and our government will be saddled with even MORE debt.

[WatchingInMalibu]

It feels like rather than bailouts, the real way to go here is specific solutions to specific problems. For example, Fannie Mae is effectively going to let people in houses refinance even if they're underwater at a better and/or fixed interest rate. They're doing this solely out of self-interest, so they don't have to foreclose and/or write down the principal, but it's a good solution to a problem for a specific class of homeowners who otherwise might be tempted or forced to walk away. They get to keep their house, and assuming over time, prices recover, everyone wins. Yes, it's only 150k homeowners, but that's a very good start, and could easily be copied across other lenders.

[Chris]

Ask the folks of Newark NJ what happens when politicians get to give away, I mean sell, real estate.

On April 16, 2008, a jury found 21 year mayor of Newark Sharpe James guilty of fraud for conspiring to sell city-owned properties to a former companion at a fraction of their value. This happened all of 1 month ago.

[David Reynolds]

I am blown away that this is coming from her. I have always like Maxine Waters but now I am questioning why. Looks like a bad case of to many political contributions has clouded her judgement.

[Brent]

I'd like to see local government purchase foreclosed property and turn it into parks and open space. Too bad that's forbidden in this bill.

You'd reduce the supply and thereby provide price support, plus you'd have the payback of more parks in LA.

Bring on the bulldozers!

[William Jones]

Given how much it costs to build low-income housing (vs. buying existing apartments) I can only imagine the stories that will come out of "How much City X paid for this house vs. how much the buyer of the home next door paid."

Let's see...that little home in La Puente that Peter had on the blog earlier will probably go for a cool half-million if LA County buys it.

[mbob]

Two words: HUD homes.

[Joseph...The Real Estate Guy]

Are POLITICIANS the most inept people in the world?

They should have done their homework 13 years ago when sup-prime loans came out full blown!

They regulate meaningless things and forgo big ticket items. I guess the CONTRIBUTIONS are larger!

[Laker]

How about letting the ordinary people to buy these foreclosed houses and fix them as they wish?
Why do we need to create a middle man, invite fraud, and make housing less affordable?
There are plenty of people that want to buy houses either be real owners, families, first timers, move up buyer and even investors and speculators. So let the fr*** people buy these foreclosed house!

If they are not buying them , it is only because they are too expensive!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
As soon as banks lower the prices, they will find buyers for all properties..even the El puente shack!
That Maxine should be voted and VETOed out of office, the sooner the better. What a joke. Letting the government buy and resell the homes...to who? to "their" people for what price? who is going to decide a good price for that?
Why don't we have the government buy rise, and resell it to us? How about gas, maybe the fed should buy oil and resell at special federal gas stations...every day we hear worse crap on that issue, and i don't know where it will all end...

[Charles Freck]

I liked Maxine Waters take on the So. LA-CIA cocaine conspiracy but she's wrong on this $15 billion deal...it ain't near enough. I don't mind bailing out the bankers for after it's all said and done it's their turn "to have their sins read back to them ceaselessly in shifts throughout eternity".

[Arti]

They're pandering, all of them. Elections are coming up, they know the Mob is angry, and so they're rushing through any kind of bill they can so as to show the Mob they are doing something. Same as the Clinton gas tax holiday gimmick (miniscule amount that went to funding highway repairs). Except these housing bailouts will cost a lot more.

Our only hope is that things get bogged down by congress' own incompetence long enough for things to get even worse (freddie and fannie warning about write-downs, more bankruptcies, widening of the crisis) so these incompetents can have something else to worry about and "fix".

[jb]

again - call her office (she actually has someone you can talk to!). It is easy in this case to make your self heard

Congresswoman Maxine Waters
10124 South Broadway
Suite 1
Los Angeles, CA 90003
Phone: (323) 757-8900

[FreedomCM]

I would rather the $15b be used to re-hab abandoned properties (already in Cleveland and Detroit, soon everywhere?) and use them for low-income housing, veterans housing, group homes, whatever.

Oh, and to plow under all the houses that have been stripped in Cleveland or are getting moldy in Fla.

Other than that, they should let the market find the right price.

[alykatz]

Sadly, Cleveland already has a bunch of nice rehabbed houses and no one wants to live in them because the neighborhoods are so fargone. Sad.

[Louis Cabeza]

I used to despair because Rep. Waters (my representative in the House) was kind of do-nothing. I guess I should have been grateful.

Isn't there a ribbon that needs cutting or a street or post office that needs renaming, Maxine? Please, stay out of the deep water.

[PeonInChief]

I disagree. This is a wonderful opportunity to increase the stock of affordable housing without having to build a thing. My biggest problem with it is that local government officials are too close to the real estate industry and might be inclined to use the money to take the junk off their hands. Why not then contract with affordable housing and tenants organizations to do the purchasing? The folks probably already have lists of properties that are likely prospects.

[anonymous]

It's easy to point out the inevitable problems in any solution as an argument for doing nothing. But the market isn't just going to magically turn a bunch of destroyed foreclosures into homes for lower and middle class Americans. Many wouldn't have the money to fix them up to make them livable and now don't have much access in the capital markets. Policies put in place by the fedral government allowed this massive speculative bubble to grow and now we have abandoned homes turning into safehouses for all manners of crime. I don't see how they would structure this to keep money from going where it wasn't really needed, but yeah, there are places that are going to turn into surburban ghettos that blight surrounding areas and imperil the public. Of all proposals, this seems to involve the least moral hazard, though yeah it's still there. A lot of people on this blog seem like they'd prefer a depression, and gangs, drugs and murder moving into thier backyard than having tax money go to some undeserving lender.

[Richard]

Anonymous: "But the market isn't just going to magically turn a bunch of destroyed foreclosures into homes for lower and middle class Americans. Many wouldn't have the money to fix them up to make them livable"

If lower and middle class Americans can't afford to fix up a house to make it livable, then your definition of "livable" must be completely out of whack. In the final analysis, why not pick up a damn hammer and fix up the home yourself?

It's one thing to say that if lower and middle class Americans were placed on a deserted island, they would just die from exposure because they're too weak and pathetic to fend for themselves.

It's another thing to say that if lower and middle class Americans were placed on an island with a basically complete house with some damage from negligent previous owners, they couldn't even fix up the house because they're too incapable.

You're saying that if instead of an island, lower and middle class Americans were in one of the most prosperous and advanced industrial countries on Earth, where they could work at lower and middle class jobs and use the money to buy any possible product or service, they still couldn't fix up a house to live in, because they are as helpless and useless as garden slugs.

That's the saddest and most insulting thing I've ever heard.

[Louis Cabeza]

Unfortunately, no I do not trust "low income" housing advocates, "affordable housing" advocates, "tenants organizations," et al., any more than I trust local officials to manage an efficient, corruption free (and most importantly, fair) program. My own impression of these organizations is that they have their own agenda, to shorthand, generally I find their behavior/actions no different from any other special interest group. They have a preconceived notion of a very small subset of the population who should benefit from their activities.

I think there is a fairness issue that they don't address well. (An simplistic example would be, "why does someone who makes $25k/year have more of a right to home ownership than someone who works equally hard and makes $50K?"-too much for the low/affordable programs but not nearly enough to realistically buy a home on your own.)

I think it's a red herring to say that people who are arguing against these bailout proposals want gang and drug infested neighborhoods. I do think that, generally:

1. They don't want the financial institutions and investors to be let off the hook.

2. They want the markets to correct so that many working people have a fair shot at owning a home, not just a few people connected to special programs.

Something should be done. Unfortunately, many people do not trust the government or public advocacy groups to do the right something. I think they need to work harder at coming up with less costly and more transparent solutions.

[Milan Cole]

Is this the best ideas our elected officials can com up with???

[PeonInChief]

In most places in California, a family making $50,000 would be eligible for moderate-income housing programs. (In some cities--like San Francisco--housing is so costly that families making $80,000 are eligible for moderate-income assistance.) In many cities a majority of the tenant population would be eligible for low- and moderate-income housing. So it's not a small subset of the population; it's a plurality to a majority of any California city's population.

Second, the city might decide to sell some of the housing, form limited equity co-ops with other housing, and maintain the rest as rental housing. Decisions like that would be governed by a city's need, the eligible population etc.

And finally affordable housing groups may have specific interests, but in this case they dovetail nicely with the intent of the program. The most important interest is one they shouldn't have--that of bailing out real estate developers and the banks.

[anonymous]

Richard, spare me the classist dribble. Many of these homes need a lot more than a hammer. We're talking about graffit-ed and torn out walls, broken or frozen plumbing, no wiring. What is every American supposed to be a carpenter?

And what does this have to do with ability in the first place? There are homes out there in parts of the country with *negative* value. Yes, cost of ownership as a liability outweighs the value of the asset. Even where it's not that bad, in many places, the cost of buying and fixing up one of these wrecks outweighs the end value. So why would anyone bother? Answer: they won't. Instead you just have a bunch of beaten up, abandoned properties turning into gang houses, crack dens, and meth labs. Talk to some police officers in lower income places where lots of these houses sit empty. They hate them. Why? Because the houses are magnets for crime. Sorry, but I'd rather not see numerous parts of the country go the way of Detroit.

[Louis Cabeza]

Yes, I have lived in San Francisco, New York and Los Angeles. I hear your rhetoric about the programs but somehow the end result does not seem to match the rhetoric in the end. This is only one person's opinion. And how these special interests "dovetail" with the public interest ends up becoming a black hole; how, and to whom the availability of these programs are communicated is another big issue. And then there's accountability, transparency, etc.

Like I said, I am not opposed to some sort of action, I am just extremely skeptical about corruption, cronyism, etc. I'd love for our public officials to prove me wrong. I just don't think that this proposal by this politician is going to do it.

Ultimately, we are wasting our time talking about generalities. Please feel free to point out specific programs with specific, proven results in specific cities.

I would also suggest that land use/development regulations be looked at more closely by communities, if there are too many overpriced homes being built in specific places. Public officials have played a role in creating this mess, too.

[Milla]

Louis: i bought my house three months ago with assistance from a moderate-income program run by CalHFA and LA's Housing Department. if you check CalHFA's current mod-income limits for LA County, they're capped at around $90K.

before receiving my assistance, i was required to take an eight-hour homeownership class, which had people overflowing into the doorways of the room and crowded around the tables. trust that there's enough interest and publicity that people know about these programs, and know that they're at work in their communities.

and this was NOT for subprime borrowers. i had three underwriters at work on my loan and had to provide three years worth of tax returns, current pay stubs, proof of citizenship, assets documentation, credit history, etc. it was no easy feat to even get the loan -- lots of bureacracy and waiting.

but it was worth every agonizing minute as it got me into my first home on my middle-class salary (under $90K in LA!!). and my new home was a foreclosure that could have easily turned into a crackhouse had it been left to sit on the block indefinitely.

[Louis Cabeza]

Milla: Thanks for the info. I am going to look closely at this.

My question now is, if there is this great program that serves the entire state of California, why would you want to start a new, parallel program run by cities? The expertise already exists. Why create another bureaucracy rather than lobbying for more funding for a solution that works in partnership with the private sector?

[PeonInChief]

Moderate income housing isn't all we're talking about here. We're also talking about housing for extremely low (30% or median) and very low (50% of median) income people. The purchasing schemes for people who really can't even pay the operating costs for housing have to be very different than those for people making $90K.

[Louis Cabeza]

Yes, but should the government be subsidizing people who make $25K/year to buy houses at $250K-$300K?? Why should should I want to subsidize housing prices and another governmental bureaucracy?

All I want I want as a stakeholder is to see actual numbers about middle income or low income housing programs that are successful. Clearly defined goals, social and financial, and clearly reported results (including all costs).

If you really want to do this, let's stop talking in generalities. If the programs already exists, lets see it. If it doesn't, create it and then we can talk about funding it. But it shouldn't be some shoot from the hip piece of legislation.

And to be fair to everyone, perhaps the mortgage deduction should be possibly eliminated.