The Questionable Aspects of The Housing Bailout Bill - H.R. 3221
In my last article I wrote about the one aspect of the $300 billion dollar housing bailout that I thought made sense, but the full text of the bill known as H.R. 3221 is over 700 pages so it is too complex to discuss in any one blog post. Today I shall highlight some of the more questionable and even dangerous aspects of the bill.
Loose underwriting standards for troubled homeowners - In a section called "Flexible Underwriting Criteria", the bill states that The Oversight Board will "ensure that each mortgagor under a mortgage insured under this section has a reasonable expectation of repaying the mortgage, taking into consideration the mortgagor's income, assets, liabilities, payment history, and other applicable criteria, but which shall not result in a denial of insurance solely on the basis of the mortgagor's current FICO or other credit scores, or any delinquency or default by the mortgagor under the existing mortgage or mortgages, or any case filed under title 11, United States Code, by the mortgagor." Basically it says that a troubled homeowner can still qualify for a new government insured loan despite bad credit and past financial mistakes. This is encouraging for those truly trying to get out of their real estate nightmares, but I imagine it will probably result in more defaults because some financially irresponsible people just never change. When those second defaults come in, tax payers will have to eat more loan losses.
Revenue recovery through home sale profits - According to Section 257 of the bill, if the FHA gives a loan to a troubled homeowner then the FHA is entitled to an exit premium. This means that when the homeowner sells the home and makes a profit the FHA can collect all or a portion of the profits. The FHA is entitled to 100% of any profits realized within one year, 80% of any profit realized within two years, 60% of any profit realized within three years, and 50% of any profit thereafter. I can see a lot of ways to get around this provision. For example, sellers and buyers can work out a deal where it looks like the seller is not making a profit, but in actuality the buyer gives the seller cash in the form of a "gift". It also does not seem clear how they will collect these profits.
Credit card and other payment processors must report transactions to the IRS - At first glance, I thought that it was strange this is in this housing bill. Apparently, the government believes that if all credit card and other monetary transactions such as PayPal are reported they are likely to receive more tax revenues. Groups and consumers concerned with privacy are very wary of this provision because many small business owners use their own Social Security Numbers as a tax ID. See more information in this article from Computer World .
More tax credits and deductions for homeowners - There are over 60 sections in this bill related to various different tax incentives. One section describes the $7500 first time homeowner tax credit that I discussed a while back in this article. Another section allows an additional standard deduction on the federal tax return for filers who do not itemize for their local property tax. The additional deduction is $350 for an individual filer or $700 for a joint return so the impact should not be very big. As I said in my previous article, I think there are enough tax credits for homeowners already.
The Treasury gets a blank check to maintain Freddie Mac and Fannie Mae - The Treasury is given the authority to buy stocks and debt in these two giant Government Sponsored Enterprises in order to keep them afloat. In short, taxpayer money will be used to cover losses Freddie and Fannie incurred. This is pretty irresponsible considering that most tax payers did not benefit from Freddie and Fannie financially when their stocks were darlings of Wall Street. Now that these companies are falling down it is the taxpayers that have to pay for the damage.
The national debt limit is raised by $800 billion - All I have to say is, why do they even bother with a limit if they intend to spend and borrow as much as they can? This increase brings the debt ceiling to $10.6 trillion, and that is equivalent to about 75% of America's gross domestic product. This will probably devalue the dollar as America becomes a more risky place for investment.
The Senate is set on voting for this bill this week and President Bush has backed off from saying that he would veto this bill so most likely it will pass. I think this bill will be very costly to every tax paying American resident. It could also have the effect of artificially propping up home prices because lenders will probably jump at the chance of getting whatever they can from the government rather than going through a long and painful foreclosure process. If the government's agenda is to advance affordable housing, then this bill is not the answer.
What do you think of this complex and far reaching bill? Do you think it will help Americans or backfire in a horrible way?