Building on news that the bipartisan consensus behind the Senate’s “Foreclosure Enhancement Act” is beginning “to crumble,” the White House sent a letter to Speaker Nancy Pelosi (D-Calif.) today outlining what they would accept in housing legislation. The letter includes many strong principles that ought to be congratulated, including:
We must not prolong unnecessary corrections in the housing market, bail out lenders, or subsidize irresponsible borrowing and lending, at the expense of hardworking people who have played by the rules. … Housing legislation should not penalize the millions of American homeowners who work hard and live responsibly within their family budgets so that they can make their monthly mortgage payments.
The good news is that the unilateral mortgage contract rewrites, the tax credits for foreclosed homes, and the multi-billion dollar slush funds for state and local governments are all identified as non-starters by the White House. Unfortunately the White House does seem to embrace what is essentially a “Frank-Dodd Lite” policy for Federal Housing Administration action.
Like Frank-Dodd, the White House wants to see lenders agree to lower loan amounts and payment terms in return FHA guarantee on 100% of the loan amount. To offset the increased risk to the taxpayer, the borrowers will have to pay a surcharge. Unfortunately there is no market mechanism to inform what the adequate size of the surcharge should be, so taxpayers will be on the hook for billions in guaranteed loans.
Not only will irresponsible lenders be rewarded by being able to dump loan default risk on to taxpayers, but taxpayers should not be in the business of bailing people out in the first place. For a fuller critique of the Frank-Dodd bill, check out Heritage analyst David John’s paper here.