Seeing as how we have dealt with the Fed and interest rates, the evils of speculative oil trading, and consumer confidence in the past few days, it's now time to turn our attention to the housing relief bill working its way through the system.
It's complicated, but essentially it's a rescue re-financing plan. Distressed borrowers can apply for a more affordable 30 year mortgage if they are in their primary home and if lenders agree to cut the loan balance to about 85% of the original size.
Skeptics say the plan is a handout for irresponsible borrowers and lenders. The worst performing mortgages would be the ones that would wind up being refinanced and the taxpayer would be liable if it failed. The proponents say foreclosed homes are worth much less and keeping homeowners in their homes is worth the risk and trouble involved.
Whatever ! The thing that troubles me the most is that Fed agencies like the Federal Housing Administration, and quasi-government agencies Freddie and Fannie are to be involved. The FHA just reported a $4.6 billion loss. That's $4.6 billion. It came about by a "down payment assistance" program where a homeowner got a third party to make a down payment so the loan could qualify for FHA insurance. No money in, no skin in the game, walk away if tough times come. To potentially take over supervision of troubled loans to the projected tune of $300 billion might be a tad risky for the taxpayer. The FHA's record is not confidence inspiring.
Fannie and Freddie are being looked upon as saviors of the troubled housing market as well. They will be allowed to buy bigger loans and otherwise extend their reach into the housing market further. What bothers me here is Fannie has a debt-to-equity ratio (a measure of how leveraged they are) of 27 to 1, and Freddie 20 to 1 (thanks to David Wessel of the WSJ for those stats.)
Bank of America and JP Morgan are both about a 4 to1 debt to equity ratio. So let me be sure I have this right. Two quasi-government agencies, with scandalous accounting issues in their recent past, leveraged to the gills far beyond what the private banking system would allow (and haven't those banks suffered as well?) are going to lead us to the promised land and away from the housing debacle. Right!
I feel the need to assist the unwitting homeowner who got in over his/her head, but not this way. This has the potential for disaster. It's another example of politicians rushing to conclusions with an eye on the ballot box and not on a levelheaded well though out plan. But what am I saying ? Level headed, well thought out, and politician do not belong in the same sentence.