TOPICS > Economy

Wide-reaching Housing Rescue Legislation Moves Forward

July 23, 2008 at 6:10 PM EST
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The House approved Wednesday a hotly-debated housing rescue package aimed at helping strapped homeowners avoid foreclosures after President Bush dropped his opposition to the bill. Experts examine the measure.
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KWAME HOLMAN: The line stretched down the street and around the block yesterday, as thousands of distressed homeowners, many facing foreclosure, braved sweltering heat in Washington, D.C., in an effort to keep their homes.

FORECLOSURE ASSISTANCE EMPLOYEE: I want you to fill out this and go to the end of the line outside.

KWAME HOLMAN: The nervous borrowers were in Washington at the same time as Congress moved toward final action on a major housing bill aimed at helping such homeowners.

CONGRESSMAN: … this potential of putting the American taxpayer on the hook for $5 trillion…

CONGRESSWOMAN: The tools and resources will be made available to you to help you stay in your home.

KWAME HOLMAN: At a downtown hotel, the nonprofit Neighborhood Assistance Corporation of America organized a five-day event to guide homeowners through the daunting process of renegotiating their home loans.

Darren Duarte is a spokesman for the housing advocacy group.

DARREN DUARTE, Spokesman, Neighborhood Assistance Corporation of America: What you’re seeing here is counselors, 300 counselors, going over their mortgage documents. We’re verifying the documents that are scanned in. And we’re telling the homeowner — we’re showing the homeowner what they can afford and not a dollar more.

SHERMAN MOOREFIELD, Homeowner: I’m just trying to find some relief.

KWAME HOLMAN: Sherman Moorefield lives in Silver Spring, Maryland, just outside Washington. His mortgage interest rate now stands near 7 percent, but is set to adjust several points higher soon.

What would happen if you had to pay the 9 percent or 10 percent?

SHERMAN MOOREFIELD: I’d probably end up losing my home, because right now I’m paying $2,700 a month for my home, and that’s tough.

KWAME HOLMAN: Did you know of any other place you could go to get help?

SHERMAN MOOREFIELD: No. There was no help until we heard about this.

KWAME HOLMAN: But some Republicans have criticized the package as too expensive. Jeb Hensarling is from Texas.

REP. JEB HENSARLING (R), Texas: We’re being asked to take — really, this is an historic moment — we’re being asked to take a terribly flawed housing bill that could put the taxpayer on the line for $300 billion to help bail out people on Wall Street who made bad bets, and then couple that with a breathtaking, an absolutely breathtaking bailout of Fannie and Freddie that, in its worst-case scenario, which admittedly is unlikely, but in its worst-case scenario could add $5 trillion to the national debt at the snap of a finger.

KWAME HOLMAN: Massachusetts Democrat Barney Frank, the bill’s lead author, said the House should not let the perfect be the enemy of the good.

REP. BARNEY FRANK (D), Massachusetts: It is inconceivable to me that anybody would like everything in this bill, because it is the product of a very significant set of compromises. But we are here in substantial part because of a terrible housing crisis that has affected the economy of the U.S. and the world.

KWAME HOLMAN: John Campbell is from California, a state with a deluge of foreclosures. He was one of many Republicans who now reluctantly support the housing bill.

REP. JOHN CAMPBELL (R), California: I am going to support this bill today, and I’m going to support it because we are in a position where we cannot afford to not have Fannie Mae and Freddie Mac in the marketplace. If you think the economy is tough now, watch what would happen if we took 50 percent of our lending capacity out of this marketplace today.

KWAME HOLMAN: Massachusetts Democrat Richard Neal said the measure is designed to prevent that failure and to provide a boost to a troubled sector of the economy.

REP. RICHARD NEAL (D), Massachusetts: This bill offers hope that, if we can get industry up and moving again, and provide security for distressed homeowners, maybe the economy will respond, and get back on track, as well. We all know how important the housing industry is, not only to American economic security, but to overall economic gain.

KWAME HOLMAN: But many municipalities aren’t waiting for federal action.

GERALD CONNOLLY, Board of Supervisors Chair, Fairfax County, Virginia: Three years ago, we had 200 foreclosed properties in Fairfax County. This year so far, we’ve had 7,000.

KWAME HOLMAN: Gerry Connolly is chairman of the Fairfax County, Virginia, Board of Supervisors and a Democratic candidate for the House. Situated just outside Washington, Fairfax is the wealthiest county in the U.S. on a per capita household income basis.

Nonetheless, Fairfax, too, has housing troubles. So last month, Connolly’s board passed a measure to extend financial counseling to hundreds of endangered homeowners, help families find second trust mortgages, and use county funds to buy and restore distressed properties to prevent blight.

GERALD CONNOLLY: If you can help stabilize a neighborhood by buying that key property at the end of the street, and rehabbing it, and putting a family back into that home, you can help turn around a distressed neighborhood. So it’s one of the first in the country. And we think it could be a model in anticipation of these new federal dollars.

KWAME HOLMAN: The housing bill also includes nearly $4 billion to help localities buy foreclosed homes. The House passed the bill this afternoon. The Senate is expected to do so within days. And President Bush now says he will sign it.

The housing bill as a first step

Michael Calhoun
Center for Responsible Lending
The way this would help -- and it's not meant to solve the problem, but it's an important first step -- is it would provide an option for borrowers who owe more on their houses typically than what the house is worth.

JUDY WOODRUFF: Ray Suarez has more on the story.

RAY SUAREZ: Help for many such homeowners could come from the bill debated in the House today. It would create a $300 billion Federal Housing Administration fund to help struggling homeowners refinance their mortgages. Lenders would have to write down a portion of their loans. It also modernizes and expands the FHA's ability to buy problem mortgages.

The bill shores up giant mortgage lenders Fannie Mae and Freddie Mac by allowing the federal government to extend its line of credit to both companies and buy equity in them if needed. The Congressional Budget Office estimates that plan ultimately could cost taxpayers more than $25 billion, if fully enacted.

And the bill creates a new regulator of their finances.

For some analysis about who's helped by the bill, who isn't, and how it's all meant to work, we turn to two representatives from homeowners groups and mortgage lenders.

Michael Calhoun is the president of the Center for Responsible Lending, a not-for-profit homeowners' advocacy group. And Francis Creighton is vice president of legislative affairs for the Mortgage Bankers Association.

And, well, Mr. Calhoun, this insurance program, how is it meant to help the people that we saw in the piece earlier lining up to get help with their troubled mortgages who are afraid of losing their houses?

MICHAEL CALHOUN, Center for Responsible Lending: Well, they are in a large group of people, because today about 8,000 families each day are going into foreclosures, and the projection is that, over the next five years, about 1 in 8 mortgages in the U.S. will go into foreclosure. That's 6.5 million foreclosures.

The way this would help -- and it's not meant to solve the problem, but it's an important first step -- is it would provide an option for borrowers who owe more on their houses typically than what the house is worth.

And if they can get the lenders' agreement and consent -- and that's a big if -- the federal government would ensure the new loan that was made, but only up to 90 percent of the value of the house.

RAY SUAREZ: Of the new value of the house?

MICHAEL CALHOUN: The real value, the current value of the house, not what they owe on the house with the debt that they took out earlier.

Other factors are -- it's got pain for everyone. The lender has to write down the value of the house. The homeowner has to pay into the insurance fund. Actually, a private lender provides the loan, and the government doesn't provide the loan funds, but ensures that they'll be repaid, so the risk for the government is that, if there's a default, it will be on the hook.

To cover that risk, it requires that the lender reduce the loan value and contribute to the insurance fund. And it also requires that the homeowner pay extra money into the insurance fund.

And then, finally, the homeowners are required to share any increase in the value of the home with the insurance fund. So if they get one of these loans, and then subsequently resell the house at a profit, they have to share some of that profit back into the insurance fund.

Lenders likely to seek loan help

Francis Creighton
Mortgage Bankers Association
We think that this is a good program that's going to give borrowers and lenders another tool to work together to avoid foreclosure.

MICHAEL CALHOUN: But the big thing that everyone doesn't know is how many lenders will be willing to send loans to this program. The borrowers can't just say, "I want to be in the program," and then have a right to participate. They have to get the consent of the lender. And that's been a problem so far. And that's been one of the bottlenecks in resolving this housing crisis.
RAY SUAREZ: Well, Francis Creighton, do you know how many people -- how many lenders are willing to participate in this program, the question that Mr. Calhoun just asked?

FRANCIS CREIGHTON, Mortgage Bankers Association: Predictions are always difficult, especially when you're talking about the future. We don't know exactly.

RAY SUAREZ: Well, you must be getting feedback from your members about how this bill is cast.

FRANCIS CREIGHTON: Sure. What we're hearing is that lenders are going to use this bill, that they are going to take advantage of it. The Congressional Budget Office suggests that as many as 400,000 people could be helped by this. And we haven't heard anything that would disagree with that number, but we don't have an estimate on our own.

The fact is, we think that this is a good program that's going to give borrowers and lenders another tool to work together to avoid foreclosure, which, as everyone knows, is expensive not only to the borrower, not only to us, where we lose money on a mortgage that goes into foreclosure, but it's most expensive to the community that's around them. And we want to stop that now.

RAY SUAREZ: Well, last year, on average, a house lost 15 percent of its previously assessed value. To sort of use big, round numbers, that's $30,000 grand off a $200,000 house. Would a lender rather take that hit and rewrite the loan for that new amount than have the house go into foreclosure? Is that a preferable situation?

FRANCIS CREIGHTON: In some cases, it will be. A mortgage that goes into foreclosure is going to be expensive for the lender to close out on. You've got to pay for legal fees; you've got to pay the realtor, the commission to sell the home eventually; you've got to pay for all of these many costs. And that's expensive for a lender.

If the lender knows that they can take a certain percentage -- in this case, 85 percent of the current value of the home -- then they know that there's a limit, that there's a bottom to this problem, and that they can say, "At the maximum, I'm only going to lose this amount."

And that's stopping the bleeding is what's really important here, because what we're seeing right now in the financial markets is, whenever a lender finds some of these loans on their books, they immediately write them down to zero. And that's causing this spiral inside the financial markets, where companies are just writing down debt after debt after debt.

This gives them a floor to that. And it makes it possible for them to write down the debt to a hard number. And that then puts a floor on the market, and then hopefully we can start building back up from the bottom. And that's a very positive thing, because this spiral that we're in right now in the financial markets isn't helping anybody.

RAY SUAREZ: And if the sector recovers, your members are in for a taste, as they say. If the price of the house recovers, you'll be part of the profit picture.

FRANCIS CREIGHTON: We wish that were the case. It's actually the government that gets the benefit of the appreciation, not the lender.

RAY SUAREZ: The entire benefit?

FRANCIS CREIGHTON: Yes. The lender actually does not get any of the appreciation in this. The lender, once the lender makes the deal, he's out of the deal at that point. He's already walked away from it. But the government, through a kind of silent second mortgage, gets the benefit of any appreciation that's in the home.

I'm not sure that we would have written it that way, if it were up to us, but that's the way it is. And we still think it's a good thing. We think it's a positive way to go about this.

The controversy behind the measure

Michael Calhoun
Center for Responsible Lending
Studies show that just having foreclosed properties in your neighborhood dramatically reduces the value of all the homes in the neighborhood.

RAY SUAREZ: Let's take a look next at the aid to heavily hit communities. In our earlier report, we saw Fairfax County. There are many communities like that around the country, where foreclosures are a big part of the housing scene now. This was a controversial measure. What will it do?

MICHAEL CALHOUN: It provides $4 billion of aid to local governments to come in and both maintain and hopefully recycle these foreclosed properties, which are often abandoned and un-maintained and become a blight, a haven for crime in neighborhoods.

And studies show that just having foreclosed properties in your neighborhood dramatically reduces the value of all the homes in the neighborhood. And then, in turn, it makes it harder for anyone to sell a home in the neighborhood, even if they're not foreclosed. They're just trying to move to a new job or retire to another location.

So the idea would be local governments could both, first of all, make sure that they're maintained -- you don't have weeds growing up there -- and, second, hopefully recycle them. For example, a number of the government programs even work with groups like Habitat for Humanity. They'll buy an abandoned property and then sell it either at a low price or just recover their funds to a nonprofit group, who will then rehab it and make it available to a new homeowner, so...

RAY SUAREZ: Because getting people back into these homes is important, right?

FRANCIS CREIGHTON: Absolutely. And the important thing is that the needs in Ohio might be different from the needs of Miami. And this proposal allows people to deal with the needs of the local community as they see fit. This isn't a one-size-fits-all kind of thing.

RAY SUAREZ: Let's move next to the part of this proposal that got a lot of attention and attracted a lot of debate, and that is support to Fannie Mae and Freddie Mac. How will that work?

FRANCIS CREIGHTON: Fannie Mae and Freddie Mac are very important not only to the housing market, but to the entire global system. This bill does two things specifically. It creates a new regulator for the GSEs -- what we call the GSEs, Fannie Mae and Freddie Mac, the government-sponsored enterprises -- it creates a new regulator for them that has world-class bank-like authority powers.

So these companies that are so important will have a regulator that has some real teeth and some real power to make sure that they're doing the things that they can do in supporting their mission of providing home ownership opportunities for people and maintaining these companies as shareholder-owned corporations. This is a good thing to have such a strong regulator.

It also provides the Treasury secretary with a series of tools that he's going to have or she's going to have in the future to create the situation, if they do get into trouble, that they can come in and help the companies get out of that trouble, specifically by allowing the Treasury secretary to buy a kind of preferred stock in the company and recapitalize them very quickly.

It's got a lot of other tools that he would be able to take advantage of, if, in fact, something very untoward happened. And if something did happen, of course, you'd want to stop it right away, because the global financial impact of these companies is so strong and they're such an important part of our housing market and the global financial system.

Avoiding a credit market collapse

Francis Creighton
Mortgage Bankers Association
There's no silver bullet here, but this bill does several very good things.

RAY SUAREZ: Well, Michael Calhoun, we saw members of the House on the floor today complaining vehemently about just those provisions, that, in effect, you're putting the federal government on the hook for possibly large amounts of money in support of these two entities and, in effect, subsidizing risk by privatizing gain and socializing loss. How do you respond to those critiques?

MICHAEL CALHOUN: Well, first of all, I think some of the members spoke on the segment earlier. The impact to the economy would be nothing short of a disaster if Fannie and Freddie were not available.

Right now, they finance the majority of mortgages, meaning that they guarantee the mortgages, so that investors, both insurance and pension funds here and investors from around the whole world, will provide money for mortgages. So the first thing, if they failed, it would be very difficult to get a mortgage.

Probably more importantly though, it would collapse the overall credit market in this country. Investors would lose confidence in all United States credit instruments, and it would raise the cost of credit for everyone.

But there is a good point there, that this is once again the government coming to help private enterprises. These are private, for-profit corporations. And previously the Federal Reserve provided substantial money to bail out Bear Stearns.

And we've seen -- you know, we'll see assistance for banks. They've been offered additional credit. And we believe that those steps are appropriate, but similar magnitude of effort needs to be made for the homeowners who are put in these loans.

The typical subprime loan, for example, is $159,000. We hear the stories of the free-wheeling speculators in Florida, but even there the average foreclosed property in Florida is about $255,000.

So most of the people who are getting hammered with these foreclosures in most of the communities are modest folks who qualified for prime loans and often got stuck in these crazy subprime loans.

So we support what they're doing for Fannie Mae and Freddie Mac, but need to see next steps. This was a good first step with FHA to help homeowners, but we need to see more and we will need more.

Everyone agrees that this is not going to solve the housing crisis. It's not going to go away in the next six months. I think the consensus is people expect things to be tough until probably at least 2010.

RAY SUAREZ: Not going to solve the housing crisis, but will it keep people who are in danger of losing their homes in their homes?

FRANCIS CREIGHTON: There's no silver bullet here, but this bill does several very good things. We've already talked about the FHA rescue package, but there's also the FHA modernization.

For years now, one of the reasons why the subprime market grew up the way it did is because the Federal Housing Administration had stopped becoming an opportunity, had stopped becoming a partner for lenders in many communities across the country, because the average FHA loan or the maximum FHA loan was about $200,000. And in many communities, that didn't buy you very much.

And so lenders stopped using the FHA program. And they went into other products, like the subprime products. So it's going to help them help borrowers get into other loans from the FHA, which everybody acknowledges are quality, good loans.

RAY SUAREZ: Because they'll be able to underwrite higher-priced homes now?

FRANCIS CREIGHTON: Exactly.

RAY SUAREZ: Gentlemen, thank you both very much.

MICHAEL CALHOUN: You're very welcome.

FRANCIS CREIGHTON: Thank you.