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

[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.

[Gavin]

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[Dave Sanford]

My concern is that the economy will stay bad until there is liquidity in the housing market.

Most of the proposals I see to address that try to help people keep prices at the last sale value
which is artificially inflating prices over the current market clearing amount. The Economist
had an article on this:

http://www.economist.com/finance/
displaystory.cfm?story_id=12470547

which cites Luigi Zingales - Plan B paper.

http://faculty.chicagogsb.edu/luigi.zingales/research/
PSpapers/plan_b.pdf

It not only has a proposal based on things that have been done before, to avoid foreclosures
while lowering house prices to the market rate, but also addresses the connectivity risk
between banks and other financial institutions.

Anyone interested in thinking carefully about future economic policy should read Zingales Plan B paper.

[Edith McGlynn]

The public that voted for this administration deserves what they get however, the honest voter will also have to suffer along with the people that believed the lies they were told. I can hardly wait for the fallout of the Obama adminstration. How can anyone believe that this whole stimulas pkg was not just pay back for the dollars paid to get this fool elected? Our children, grandkids and great grandkids are going to still be paying this money back.