NCPA - National Center for Policy Analysis


April 3, 2008

Mortgage foreclosures haven't yet hit their peak, it's an election year, and Congress is back in session.  Hold onto your wallets because a housing bailout is moving forward unless the White House says no, says the Wall Street Journal.

Senators from both parties agreed late yesterday to throw about $11 billion more at the housing market.  But think of Uncle Sam as the subprime lender of last resort and you are getting close to what the Beltway is contemplating.  In the name of preventing foreclosures, House Financial Services Chairman Barney Frank wants to transfer the risk of further declines in home prices to taxpayers from lenders and borrowers, says the Journal:

  • Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan.
  • Lenders would have to write down their loan to no more than 85 percent of the current appraised value of the property -- which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.

For the borrower, the deal is even sweeter, says the Journal:

  • A low fixed monthly payment and a reduction in the principal to market value.
  • The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis.
  • The deal is so sweet that even Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance.
  • His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.

In sum, Frank is volunteering U.S. taxpayers to insure $300 billion in mortgages with underwriting standards to be named later.  Connecticut Senator Chris Dodd thinks $400 billion is more like it. 

Source: Editorial, "Uncle Subprime," Wall Street Journal, April 3, 2008.

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