The Questionable Aspects of The Housing Bailout Bill - H.R. 3221

by Xin Lu on 24 July 2008 20 comments

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 .

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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?

 

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Guest's picture
Eden

Sounds horrible! What happened to our free market system and letting failures like these work themselves out?

The increased debt load is beyond ridiculous.

Guest's picture
Sarah

Sadly, you are right. The politicians won't look beyond November 4th, but they forget that they have to live here too.

The Government Accountability Office, despite being part of the government, is truly excellent. You can tell it's good because no one listens to them. They did a study in April 2007, called, "The Nation's Long-Term Fiscal Outlook." The subtitle is, "The Bottom Line: Federal Fiscal Policy Remains Unsustainable."

http://www.gao.gov/docdblite/details.php?rptno=GAO-07-983R

If you click on the PDF link, the graph on page one could have been drawn by Daffy Duck: "Shoot me now, or shoot me later." Both scenarios show our economy dying, and these do NOT take this new $800 Billion increase to our deficit into consideration.

Figures 2 and 3, on pages 3 and 4, show more detailed graphs for these scenarios that show where the money goes. Figure 4 is particularly disturbing. It shows the projection with keeping Bush's tax cuts. By the year 2040, the NET INTEREST ALONE will be almost twice the Social Security payout.

Again, this projection is BEFORE this $800 Billion addition to our national debt. I expect to be dead by 2040, but I really care about America. Whatever your political affiliation, please call or write your Congressman and Senators and ask for fiscal sanity. The names and contact info are at:

http://www.house.gov/
http://www.senate.gov/

And please vote in November. The only wrong vote is the one that you don't cast.

Guest's picture
Kelja

It's the blind, deaf & dumb leading the blind, deaf & dumb. Another fantastic example of our Wonderful politicians & bureaucrats managing our lives.

One consequence of allowing homeowners who are presently struggling to have, as the result of taxpayer largess, their mortgages reduced is to encourage other homeowners opt in. Think about it. Your neighbor has his mortgage principle reduced to 87% of what it was originally. This bill will offer that to those who have missed payments.

Now, you happen to be paying off your mortgage responsibly, faithfully... but the value of your house has dropped 15 - 20 - 25% and you see your neighbor get a helping hand from the taxpayers.

Hmmm, what happens next? Not tough to figure this out. Our responsible neighbor becomes irresponsible - misses a couple payments. He calls the bank and inquires about this new government program!

Wow, an unintended consequence that makes the whole mess get worse. Now - you would've thought all those smart politicians and bureaucrats in Washington would have foreseen this, wouldn't you?

Nah!

Hate to say this and cause a ruckus, the free market has been lost. I have come to the realization that the average person isn't ready for capitalism. And now we've entered into a socialist/fascist economic system, where government either own the means of production or heavily regulates it.

Neither Obama or McCain - both democrats, one more liberal than the other - will save us.

Guest's picture
Guest

re: your second point, IANAL, but that would seem like a fraudulent conveyance designed to undermine the FHA as a creditor. FHA might be able to bring a claim in bankruptcy if the seller is bankrupt, and otherwise might be able to bring a valid state law claim
(breach in contract law and violation of good faith? claim in equity?) if the seller is not in bankruptcy.

Any lawyers out there who can speak to this issue?

Guest's picture
Guest

It sounds crazy - to the logically thinking person, however given what has happened in recent years it seems that there are very few clear and/or logically thinking people left. What is another billion or trillion when you are already up in that neighborhood already? I really think that bailing everybody out is stupid and it makes me so angry. We are on the downhill side of our mortgage and how unfair is that when people who KNEW that they couldn't afford the silly huge mortgage can maintain their home and their standard of living when those of us who scrap and save and pay-off on our own get nothing but a bill (hidden in a pile of increases) to pay off theirs as well????!!!!???? Just wait until "president" Obama takes over and stacks up some more bills for us to pay for everyone, including the illegals. Seems we're all going to hell in a handbasket.

Andrea Karim's picture

When will we learn? For as long as I can remember, the American economy has been one massive bubble that eventually bursts, showering light on the corruption that started the bubble to begin with, followed by recession - and then the next bubble. We sure seem to love our hills and valleys.

Guest's picture

The government should not be in the business of bailing out people, industries or anyone. What about those who lost money in the internet bubble? What about bear stock market cycles. Where does it stop?

Xin Lu's picture
Xin Lu

The funny thing is. Nearly everyone I talk to think the bailout is a bad idea no matter if they're liberal or conservative. I live in the Bay Area so it's more liberal. Then when I looked in the news the only people applauding this bill are Realtors and bankers. Every other news report seem to say that it is a pretty bad idea. Even though it is anecdotal I feel like MOST Americans think that this bailout is a bad idea. So how come their representatives don't agree with them? I thought this was a democracy? Oh right, democracy is only accesible to those with lobbyists in Washington. 

Guest's picture
Tony

Another great group of people that nobody ever listens to are the economists of the Austrian School, who correctly predicted this awful mess years ago. Check out the Ludwig von Mises Institute.

Of course, the Federal Reserve's deliberate debasement of the dollar is almost entirely to blame. The business cycle is not an uncontrollable natural phenomenon, but rather the product of central bank interference in our money.

For a great introduction to this topic, check out Murray Rothbard's What Has Government Done To Our Money?. No equations and dense mathematics- I promise!

Guest's picture
Sarah

I'll check them out

Guest's picture
dagny

This is yet another step deeper into fascism - nothing new.
My question is: Where were these leaders when the housing/mortgage bubble was inflating?
Now the dollar will continue to decline. BTW it has declined almost 95% since 1913 when the Federal Reserve system was created.

Guest's picture
Kelja

Yes, many do vehemently agree that this bill is a bad idea. That is, unless you happen to be a homeowner underwater because of poor decision-making.

It doesn't matter - the ruling elite have decided in their wisdom that the bankers and wall street must be rescued. The ruling elite do not care because the American people are sheep.

I blame both Repubs & Dems for this lame-as^$#d flop of a piece of legislation. Conservatism is dead for the foreseeable future, and with it our future, our children's future and our grandchildren's future is in jeopardy.

Why did this legislation promoted by Barney (D) Mass & Dodd (D) CT ever get as far as this?

Corruption.

Guest's picture
nuclear

http://www.youtube.com/watch?v=BFDlOzJGriI

First of all. Bernake and Paulson look like stooges sitting there and Paulson ineptly tries to dodge every question put to him. Is this performance by public officials supposed to inspire confidence? This whole bill is nothing more than welfare for Wall St. and stinks of corruption and payola. Thomas Jefferson warned about the sorts of games bankers play:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
3rd president of US (1743 - 1826)

Guest's picture
nuclear

http://financialpetition.org/

I forgot to post this before. One side effect of this bill will be to further deteriorate the public balance sheet and the value of the dollar. If this goes through, prices in commodities and essentials will escalate further. Interest rates have already been rising in response to the proposal.

http://market-ticker.denninger.net/index.html

At the bottom of this page is a chart of 10 year Treasury yields. They spiked about 9% in one week after the initial Paulson announcement. As government borrowing costs escalate, this will force them to issue even more debt further weakening the dollar in what could become a vicious cycle.

The result for the average American is higher costs in everything from food and gas to mortgages and imports. The middle class could be further weakened as wages will never be able to keep up with inflationary pressures in necessities. The lower class worker will be utterly devastated.

Guest's picture
Murtry

Three reasons why I will leave America when I retire:

1. The socialist housing market.

2. Obama and the Dems planning to double the capital gains tax on investors, and tax retirement funds.

3. The open border with Mexico.

It's hell to live in America when you are a responsible person who plays by the rules. It's become what I call a "socialist caste system", where homeowners reign supreme while they bleed the country dry.

Guest's picture
Guest

Forget worrying about a 20% loss in home equity.

Worry about the 50% devaluation of the U.S. dollar since 9/11.

Sure, we can "monetize" the mortgage market, effectively nationlizing the losses (up to several hundred BILLION dollars)

But that only further trashes the dollar internationally.

And since oil is priced in dollars...$6/gallon gasoline, anyone?

The rational response is capital flight - ship one's dollars overseas for anything else, at whatever exhange rate one can get.

Of course, once that happens, it is unlikely that capital will ever come back home.

Guest's picture
AndyS

Great article and I just wrote about my views on the bill. Your points just conifrm why the housing relief bill will fail. As I wrote recently - - The government again is trying to spend us out of an economic crisis, which is unlikely to work and only add to our national debt and the continued devaluation of the US dollar. Only time and a cleansing of the economic system will resolve the current mess.

 

We talk about consumers getting out of debt, what about the government who seems to love debt more than anyone else.

Guest's picture
Suz

"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?"
Amen!

I think that the national debit is so endemic of the causes behind the housing crisis. Our government should be like a good parent or sibbling and set GOOD spending habbits!

Guest's picture
Guest

Anytime the IRS is given more financial information it can't be a good thing.

Guest's picture
David C

So much for being able to make a worthy investment to secure your future. First let us hurt the quality of employment so we may try to do what we need with less money than we need; then we shall sign on for "help". This way when the real estate value returns and you decide to reap the rewards of your hard earned efforts you will give the lion's share of it to our federal government! Isn't that grand? The worst part is they are betting on the come and our leadership planned for this.