With President Bush’s letter to Speaker Nancy Pelosi Wednesday and John McCain’s speech in Brooklyn yesterday, now all three presidential candidates and the White House are supporting plans that would expose taxpayers to hundreds of billions of dollars in housing market risk. All three plans would set extremely bad precedents in housing policy, would only encourage future bad lending behavior, and are completely unnecessary considering the strong success of other voluntary federal efforts.
The basics behind each plan are essentially the same. Under the plans supported by the Democrats and the White House, lenders would agree to reduce the loan amount and refinance a mortgage rate for a cash fee. In return, the Federal Housing Administration would assume all risk for 100% of the home’s value if the borrower later defaulted (under McCain’s plan, the borrower and not the lender would first seek help from the FHA). Details on each plan are fuzzy, but the White House claims its plan would help 100,000 borrowers, while the McCain camp says its plan could help between 200,000 and 400,000 people, costing between $3 billion and $10 billion. The Democrat plan promises to provide $20 billion to the FHA to help refinance mortgages, but even the bill’s main author, Rep. Barney Frank (D-Mass.), admits it is “irrelevant” how many actual Americans are helped under his plan.
While Congress and the presidential candidates try to fine tune their rhetoric to best show they can “do something” on housing, the federal government is already helping millions of Americans avoid foreclosure. Since July 2007, the voluntary alliance of servicers, investors, counselors and other mortgage market participants that make up the Hope Now program has reworked 1.2 million loans so Americans could stay in their homes. Participants in the alliance seek to reach out aggressively to potentially at-risk, credit-worthy homeowners to help them rework their mortgages. In just January and February 2008, while the Senate was working on a housing bill that even its author admits does not live up to its title, Hope Now servicers provided approximately 309,700 prime and subprime loan workouts.
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