Some surprising positives in the “mortgage bailout bill”

The following post is taken from our “new” location, SoCalRealEstateNews.com.  This discussion is extremely relevant now that the Senate has passed the “Federal Housing Finance Regulatory Reform Acto of 2008.”   With the second largest bank failure in recent history yesterday plus the rumblings of problems for Fannie Mae and Freddie Mac, I expect this “bailout bill” will be fasttracked from here on out.

Last week I came across the Congressional Budget Office’s June 9 Cost Estimate of the Federal Housing Finance Regulatory Reform Act of 2008, more commonly referred to as the housing “bailout bill.”

According to the generally reliable, non-partisan C.B.O., this bill should actually make $800,000,000 for the taxpayers. Yup, you read that right–it’s supposed to save us money, not cost us! I quote from the summary on p. 1 of the report:

CBO estimates that enacting this legislation would increase revenues by about$8.0 billion over the 2009-2018 period. . . . Over that period, we estimate that spending from those proceeds would total about $7.2 billion. The additional revenues would thus exceed direct spending by an estimated$800 million, decreasing future deficits (or increasing surpluses) by that amount over the next 10 years.

How is that possible? Well, far from giving borrowers and lenders a free ride, the bill actually makes participating lenders discount their note to 90% of current market value, and then makes the borrowers pay FHA 1.5% of the loan balance every year and then share 50% of their equity with the FHA when they eventually do sell!

Here’s how the C.B.O. explains it (p. 7, bolding mine):

This legislation also would require FHA to charge the borrower an annual fee of 1.5 percent of the remaining insured principal balance each year. Furthermore, the program would
provide that, upon sale, refinancing, or other disposition of the residence, the borrower
would pay to FHA a share of the new equity that would be created under the program.
(This new equity would be at least 10 percent of the property’s value because of the
required write down to no more than 90 percent of the current appraised value.) [note by Dave: Some or all of this 10% could disappear if the home declined further in value after the refinance]

FHA’s share would start at 100 percent of that newly created equity, and would drop to
50 percent in the sixth year of the term of the new loan; it would remain at that level for
the duration of the loan. In addition, upon sale or refinancing of the home, the borrower
would be required to pay FHA 50 percent of any appreciation in the appraised value of
the home since the date on which the mortgage was insured (excluding the initial
10 percent equity created by participating in the program).

Some feel this is excessively harsh on the borrower.  Well, but the lender reduced the loan balance to 90% of current market value, so that 10% equity was a gift from the lender to begin with. I’m not shedding tears for the lender, either–they’re the ones who got us into this mess with those ridiculous loans to begin with. (see “How we got into this mess“)

I do sympathize with some of the naive borrowers who trusted their lender (who was often also their Realtor) way too much, I think the main focus should be on protecting the overall economy against a collapse. Protecting the taxpayer would come second, then the borrower and the lender.

So if the cost of the program is the owner giving up half their equity, so be it. Remember, the lender’s making a major discount on the principal balance, so that’s basically a gift to the borrower. Sounds like a pretty sweet deal for the borrower to me. And not a bad deal for the taxpayer, either. (See “How we got into this mortgage mess.”)

Sounds like maybe it won’t cost the taxpayers anything, and maybe we all win. Perhaps this specific bailout bill’s not such a bad idea after all!

Maybe I was right about the need for this bill after all! (See “Why we need a mortgage relief bill.”)

There’s lots more to the report, some good & some bad from my perspective, but much better than I expected overall.

That’s my opinion–for now, at least. Feel free to share your opinion below, in relatively polite language, of course. (There is a lot of passion about this topic.)