Thank You Congress, May I have Another?!!

The House of Representatives passed the The American Housing and Foreclosure Prevention Act and President Bush will apparently sign it into law. Congratulations, taxpayer! You've just been stuck with the bill for bailing out not only "homeowners" who bought something they couldn't afford, but also the institutions that loaned them the money to make the purchase.

This bill will allow some homeowners to refinance their mortgages if they can talk their lender into reducing the principal balance on the loan by about 10%. My guess is that banks will be glad to do this since, FHA will then insure the mortgage. So if these "homeowners" get in more trouble down the road, taxpayers will take the loss rather than the banks. I could be wrong but it seems to me that this is exactly what led us to the problem we have now. Banks loaned to anyone who could plausibly lie their way through an application because the banks knew they would just package up the loans into CDOs, pay a rating agency to slap AAA on the cover and let someone else worry about actually collecting on the loan. Now banks will just offload their worst loans on the American public.

The bill also provides a tax credit for first time homebuyers, because obviously the problem with the housing market is that the government just hasn't subsidized it enough with mortgage interest deductions and special capital gains treatment. There's also $4 billion for "community development" which has worked so well over the years. Everyone in Miami knows that this money will be used for the intended purpose and not doled out to favored developers. And everyone in Chicago knows that community activists tend to spend this money more wisely than taxpayers.


Fannie Mae and Freddie Mac will also get an explicit guarantee for their debt from the taxpayer. In exchange, taxpayers will get....well, we don't get anything really. If Fannie and Freddie survive, their shareholders, managers and directors will benefit. If they fail, well, then we get the bill. What we are basically being asked to do is act as a guarantor for a giant hedge fund for which most taxpayers wouldn't qualify as investors. Unlike hedge fund investors though, if it makes money we don't get any but if it loses we have to pay. Is it any wonder that the government is in debt up to our eyeballs?

In exchange for taxpayer backing, the GSEs are supposed to get a tough new regulator. Considering that the regulator will require Congressional approval from the very same pols who drove this hard bargain, count me among the skeptical. What are the chances of a real tough regulator getting past a Congress filled with recipients of Fannie and Freddie campaign contributions and lobbying dollars?

So no one gets fired at Fannie or Freddie, their stockholders don't get wiped out (as they should if they are truly insolvent) and their bondholders don't have to worry about losing any principal. Sounds like a good deal for everyone - except the poor (and getting poorer) taxpayer.