TOPICS > Politics

Housing Rescue Bill Awaits Senate, but Questions Linger

July 24, 2008 at 6:05 PM EDT
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A hotly-debated housing bill aimed at helping struggling homeowners and shoring up Fannie Mae and Freddie Mac is next headed for the Senate. Sens. Chris Dodd, D-Conn., and Richard Shelby, R-Ala., discuss the details.

JUDY WOODRUFF: The sweeping legislation passed by the House of Representatives yesterday now goes to the Senate, which is expected to approve the measure in the days ahead.

Among its key elements: it the bill authorizes the Federal Housing Administration to guarantee up to $300 billion in more favorable mortgages for struggling homeowners; it allows the Treasury Department to increase its line of credit to mortgage giants Fannie Mae and Freddie Mac and buy stock in both companies, if needed; and it creates a strong, new regulator to oversee the firms.

For more on the measure, we are joined by its principal author on the Senate side. He’s Democratic Sen. Chris Dodd, the chairman of the Committee on Banking, Housing and Urban Affairs.

And the ranking Republican on that committee, Sen. Richard Shelby of Alabama.

Gentlemen, thank you both for being with us.

SEN. CHRIS DODD (D), Connecticut: Thank you.

JUDY WOODRUFF: Sen. Dodd, to you first. A big and controversial part of this bill is aimed at shoring up confidence in Freddie Mac and Fannie Mae. But according to the Congressional Budget Office, the price tag for this, it’s not clear. It’s anywhere from zero to $100 billion. Does that worry you?

SEN. CHRIS DODD: Well, the number I think they used, Judy, was $25 billion. And the report further went on to say that there’s a greater than 50 percent chance this authority will never be used.

Sec. Paulson, in conversations with Sen. Shelby and I privately, as well as in public testimony, has emphasized that he has a strong determination not to have to use this authority.

But as you point out in your — in setting up the question, the implicit guarantee was not strong enough for many of the debt-holders, many of whom are outside of the United States. A lot of this debt is being held by countries all over the world, and they were getting nervous about all of this.

And so the secretary of the Treasury came up with this idea, an 18-month plan — we’ll be watching it very carefully — to shore up that confidence in these important institutions. And with that, we hope we’ll stabilize this market, liquidity will continue to flow, and we’ll get back on our feet on what has been the epicenter of this problem, and that is the foreclosure crisis.

The bill offers an option

Sen. Richard Shelby
[GSE reform] is a very important part of this bill. There are no good options here, but this option that we're taking, standby by the Treasury on the GSEs, is better than the alternative.

JUDY WOODRUFF: Well, Sen. Shelby, still on Fannie Mae and Freddie Mac, as you know, three-quarters of the Republicans, your fellow party members in the House, voted against this legislation. One of them called the provision to help Fannie and Freddie, he called them "financial Frankensteins" that he said threatened to gobble up their creators.

What do you say to the worried that this is the federal government helping out what are essentially private entities?

SEN. RICHARD SHELBY (R), Alabama: Well, basically, they're not totally private. They're government-sponsored enterprises; GSEs we call them.

Judy, I have been trying to reform the GSEs to have a strong regulator, to have stronger capital for about five or six years. This is a very important part of this bill. There are no good options here, but this option that we're taking, standby by the Treasury on the GSEs, is better than the alternative.

I think some of my people on the other -- on our side of the aisle, and perhaps some Democrats, too, have some misgivings about this. So do Sen. Dodd and I at times.

But this is the best bill, I think, considering housing, GSE reform, that we could put forth at this time. And as far as the standby money, we hope it won't be used.

It's not putting the money in now. It's giving the Treasury the authority to do it, to stand by. And I thought that the Congressional Budget Office number, although it was -- I think they settled on about $25 billion, as Sen. Dodd says, they might not use it. If the housing shores up, if the GSEs can raise capital, as they claim they are doing and will, perhaps we won't use it.

JUDY WOODRUFF: But you're comfortable with the fact that, if it is used, you're talking, as we said, up to $100 billion?

SEN. RICHARD SHELBY: Well, possibly, but maybe the number's much lower than that. But at the same time, if we had to take over and nationalize these entities with $5.5 trillion worth of debt, we would really have a problem. This is the best-case scenario, I believe, for us at this time.

Private money offer causes concern

Sen. Chris Dodd
The idea is to try and stabilize, and get to a floor, and get to a bottom of the residential mortgage market. In the absence of that, capital is not moving. We need to get capital moving again.

JUDY WOODRUFF: Sen. Dodd, let's address another part of the legislation. The -- I think it's $300 billion to make it more attractive for lenders to provide homeowners who are facing foreclosure with more attractive terms, conservatives and others are saying, is it really the responsibility of the federal government to be, in essence, throwing a lifeline to these folks when the vast majority of Americans with mortgages are making their payments on time?

SEN. CHRIS DODD: Well, first of all, in fact, the CBO has looked at numbers and said we actually -- the federal government may make $250 million out of this program. But they said -- and the worst-case scenario, the numbers you used, are the ones they've also suggested.

To allow the situation to continue to deteriorate is not an option, either. I think Sen. Shelby said it well on your last question. That's also true here. We've had 1.5 million people go into foreclosure in the last year; 8,400 on average every day, Judy, are filing for foreclosure every single day in this country. And if Credit Suisse and others are accurate, 1 out of every 8 homes in America could be in foreclosure over the next five years.

This is a voluntary program. Both the lenders and the borrowers voluntarily sign up. The lender takes what we call a haircut, substantially less than it otherwise would be getting. The borrower has to pay the insurance to the Federal Housing Administration, as much as 50 percent of the equity they accrue in this help back to the federal government in order to stay in that house.

No speculators can take advantage of this program. The idea is to try and stabilize, and get to a floor, and get to a bottom of the residential mortgage market. In the absence of that, capital is not moving. We need to get capital moving again. It will not move until we find out where this floor is.

So in addition to keeping people in their homes, which is a great value for neighborhoods and communities, it may also help us get to a bottom of this problem far more quickly.


SEN. RICHARD SHELBY: Judy, if I could just add to that...


SEN. RICHARD SHELBY: We're creating conditions here, conditions to where the lender and the borrower under a lot of circumstances could make this work. But it's no guarantee. It's not going to -- we're putting the lifeline out there for people who want to make this work. It has to be voluntary.

As Sen. Dodd pointed out, it's not taxpayers' money here. We're talking about private money. And it's temporary in nature. But ultimately it will be the market, as some of my friends have always said, and they're right. The market will correct this.

The housing market will be corrected by the market forces, not us. But we can help some people. And if it does help, that will be good.

JUDY WOODRUFF: Well, let me ask you. Given that, since it is the market, how confident are you that these lenders are going to take advantage of these guarantees that the federal government is saying are now going to be available, if this passes?

SEN. RICHARD SHELBY: Judy, lenders, if you own a mortgage, the last thing you want is a foreclosure, to wind up with the property. They deal in money, not owning property.

If they're willing to take a haircut and lower the price of the property to get it refinanced and under qualified borrowers that way, that will be good for the country, good for neighborhoods, and good for the lenders in the long run.

Home values plummet

Sen. Richard Shelby
We hope that people will do the right thing, if it meets what they need to do it. It will certainly stabilize the housing market and the financial market.

SEN. CHRIS DODD: Just to point out, just to point out, Judy, one of the questions you raised -- and you prefaced it by the last part of your question -- what about that other person who ended up paying a mortgage and is keeping up, he's the next-door neighbor?

For every one of those 8,400 people I mentioned who file into foreclosure today, there are 16,000 next-door neighbors. We now know that, for every foreclosure in a square block the size of one-eighth of a square mile, the property value that day for every other homeowner declines by one percent that day and crime rates go up by two percent.

You saw the news today. Here now the values of home have further declined beyond expectations. Some are predicting -- the Case-Shiller Index, which is the most reliable index, predicts we may have 30 percent decline in home values. That's the largest decline since the Great Depression. You cannot let that continue.

JUDY WOODRUFF: So right now you've -- let me ask you about the tax break aspect of this. What is it, $7,500, up to $7,500, Sen. Shelby, for first-time home buyers.

SEN. RICHARD SHELBY: That's right. And actually...

JUDY WOODRUFF: How many -- do you have a forecast for how many people and how quickly people are going to take advantage of this?

SEN. RICHARD SHELBY: Well, I hope they take advantage of it, because it would help stabilize the housing market, which will help stabilize the financial markets, which will help all of the American economy.

But I don't know how many will take advantage of it. We create these conditions. We hope that people will do the right thing, if it meets what they need to do it. It will certainly stabilize the housing market and the financial market.

JUDY WOODRUFF: Sen. Dodd, some of the numbers we read are, I guess you'd have to say scary. The national debt ceiling, Congress was asked to raise it to $10.6 trillion. These are numbers people can barely get their minds around. But essentially an $800 billion increase in the debt ceiling in order to deal with all this.

Re-assuring Americans

JUDY WOODRUFF: How do you re-assure Americans that this is a wise move that Congress is about to take?

SEN. CHRIS DODD: Well, I think Richard Shelby said it well. Look, is this what we'd like? I'm of the view we didn't have to get here, Judy. We're not going to spend any time on this program to talk about how we got here.

But the reality is these were some very bad lending practices, cops who weren't on the beat. You remember the Wall Street Journal pointed out that 62 percent of the people who were given subprime mortgages qualified for conventional loans, far less costly. We didn't have to end up here, but we have.

You have countries that hold as much as $100 billion in GSE debt. This is not like the S&L crisis, which was fairly limited to our country. It is global in its dimensions.

There's a contagion affect. It's affecting student loans, commercial lending, as well as, of course, the residential mortgage market and the financial sector, as we've already seen a major investment bank disappear in the last six months.

To do nothing, to sit back and allow this to sort of continue unfolding would be, I think, the worst option of all.

So we realize by doing this we've set up some conditions, we've set up some options and some opportunities for people. And, again, as Sen. Shelby has said, it's up to now people to take advantage of what we've done collectively.

This has been a bipartisan effort. Richard and I have worked very closely together. Our committee voted 19-2. On every amendment that's come up, we've had strong bipartisan support.

JUDY WOODRUFF: Very quick last word from Sen. Shelby. Do you expect most Republicans in the Senate to oppose this?

SEN. RICHARD SHELBY: Oh, I haven't done a vote count, but I believe this bill will carry by a heavy vote. People will vote how they feel.

But, Judy, our financial markets are stressed. A lot of our banks are stressed. Our housing interests are stressed. This is something we had to do, I believe.

JUDY WOODRUFF: All right, we thank you both, Sen. Shelby, Sen. Dodd.