Monday, September 3, 2007

Ranger George to the rescue

As a homeowner I knew exactly what I was getting into when I purchased a home I COULD AFFORD. It isn't the governments position to bailout every under financed homeowner(scary I'm beginning to sound like Hillary). I'm tired of tax money being used not only to bailout homeowners but the buck doesn't stop there, oh NO it goes on up to financial institutions which where giving money out willy nilly to make there balance sheets look good. ARM's and other types of loans which bring people in on the hoipes that they can afford a much bigger home is just as much the fault of the home owner as it is the financial institution.

Housing: Bush Rides to the Rescue, Sort Of
The President's plan to allow distressed homeowners to switch into FHA guaranteed loans stops well short of a full-scale bailout

by Peter Coy

President George Bush waded into a political swamp on Aug. 31 when he announced a plan to help homeowners who can't afford their mortgages. There's no clean solution to this mess, and Bush and his advisers know it (see, 8/28/07, "What Will Fix the Mortgage Mess? "). The President was aware that he had to do something about the plight of homeowners facing foreclosure, but he also knew that if he did too much, he would bail out people who didn't deserve to be bailed out.

In the end, the President announced a plan that attempts to strike a balance between help for the distressed and adherence to free-market principles. The key sentence in his statement was this: "The government has got a role to play—but it is limited."

The two key ideas are:

—Give a bigger role to the Federal Housing Administration, which was created in 1934 during the Depression to make houses affordable to lower-income families but shrank in recent years as it was elbowed aside by aggressive private-sector subprime lenders.

—Temporarily suspend the income tax that families face on the portions of their mortgage debts that are forgiven by lenders.
Steering a Middle Course

Bush is also jawboning lenders to voluntarily give relief to their borrowers. He's getting the
federal government to publicize the options that hard-pressed homeowners have. And he's advocating a variety of measures to improve disclosure of loan information so fewer bad loans get made in the future.

This plan steers a middle course: more government involvement than Bush previously favored but not as much as some Democrats had hoped for. Bush chose not to advocate an idea that has been widely floated, which is to let government-sponsored mortgage purchasers Fannie Mae (FNM) and Freddie Mac (FRE) buy mortgages above $417,000. The White House apparently decided that since the subprime mess is concentrated in smaller mortgages, raising the so-called conforming loan limit wouldn't do much to deal with the core issue.

The President also shied away from various kinds of direct financial aid to distressed homeowners, which could have become expensive. He didn't put a price tag on his program and didn't take questions after his statement to the news media. The Mortgage Bankers Assn. saluted the Bush plan, saying: "Every foreclosure is a tragedy."

In expressing concern about the plight of families facing disclosure, Bush is "starting to sound like a Democrat," teased Senator Charles Schumer (D-N.Y.). Indeed, the Bush plan is bound to encounter criticism from conservatives who say that people should bear the costs of their own mistakes, and who argue that giving the FHA a bigger role in lending will unnecessarily expand the role of government in the economy.

But while the plan has borrower-friendly elements, it's far from harsh toward business and wealthy individuals. For example, part of the plan is to allow people who borrowed from private-sector lenders to switch into lower-cost FHA-insured loans. So the lenders would get fully paid off, and the risk of default would be transferred to the FHA—and thus to taxpayers.

Well-to-do speculators could also benefit from the tax break for forgiven debt. The way the tax code works now, if you fall behind on a $300,000 loan, and your lender agrees to cut the amount you owe to $250,000, the $50,000 you saved is treated as income, and you have to
pay tax on it. Bush wants to waive that tax liability temporarily. Dean Baker of the liberal Center for Economic & Policy Research says that this break will be of little value to low-income families that face relatively low tax rates, but of great value to affluent speculators. White House spokesman Tony Fratto told that there would be a limit on the size of mortgage loan eligible for the tax waiver, though the amount hasn't been set yet.
Looking at Payment History

The big winner, if the plan is adopted, would be the FHA, a government agency that until recently seemed in danger of withering away because of restrictions on its ability to compete for business with freewheeling subprime lenders. The FHA provides mortgage insurance through a network of private lenders. Bush called on Congress to pass an FHA "modernization" bill that would enable the FHA to insure loans with lower down-payment requirements and higher loan limits.

He also announced an FHASecure plan, which apparently does not require congressional approval, that according to the FHA "will allow families with strong credit histories who had been making timely mortgage payments before their loans reset—but are now in default—to qualify for refinancing."

Until now, the FHA wasn't allowed to give refinancing loans to people in default because it was seen as too risky. And for the first time, starting Jan. 1, 2008, the FHA will charge higher rates for riskier borrowers instead of giving the same rate on all loans.

Expect more jockeying over what to do. In an Aug. 31 press conference, New York's Schumer said that Treasury Secretary Henry Paulson had indicated interest in allowing Fannie Mae and Freddie Mac to exceed federal limits on the size of their mortgage portfolios as long as they used the breathing room to help borrowers refinance and avoid foreclosure. But a Treasury spokesman, when asked about Schumer's statement, said that while Paulson is interested in hearing all ideas, "Treasury continues to believe that raising Fannie and Freddie's portfolio cap will not address the concerns in the subprime market."

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