Saturday, August 2, 2008

The Housing and Economic Recovery Act of 2008

On the heels of Fed's expansion of emergency liquidity for banks and investment banks, the Housing and Economic Recovery Act was signed in to law on July 30. Between the two, taxpayers are insuring at least $700 billion worth of struggling debt, which could easily expand to a trillion depending on the needs of the GSEs. If all goes well, all that debt will be paid back so taxpayers will hardly be liable for anything. However, all things considered, particularly factoring in all the news over the past 6 months, anticipating a worst case scenario is not insensible.

Cost-wise, The Housing and Economic Recovery Act has two major elements: one involves the long-anticipated mortgage bailout; the other the sudden government subsidation of Fannie Mae and Freddie Mac in response to the collapse of their stock values last month on general suspicion of poor capitalization.

The mortgage rescue part of the bill ("The HOPE for Homeowners Act") offers $300 billion of mortgage insurance through the FHA. If the bank servicing the mortgage is willing to refinance it to 90% of the current appraised value as a fixed rate mortgage, the FHA will insure it. Whether either banks or homeowners accept the proposal are "ifs" because they both turned down the conditions of the Bush bailout plan of a few months ago, prefering to foreclose instead. These provisions will be in effect starting October 2008 through September 2011. The ceiling for refinanced loans is $625,500.

The part relating to GSEs ("Treasury Emergency Authority") allows the Treasury Department to purchase common stock and debt securities issued from GSEs. There are no limits to what the treasury department may spend, and seemingly little direction on how it is spent. Essentially, I believe, people who hold securitized bonds in Fannie Mae and Freddie Mac may now consider these bonds federally insured, at least until the authority expires on December 31, 2009. GSEs may continue to purchase mortgages with needed capitalization supplied by the treasury department.

There are numerous other aspects to the bill, but they pale in comparison. One of particular note is raising the U.S. Debt Ceiling to $10.6 trillion. Last I looked the national debt stands at around 9 trillion. I didn't know there was a national debt ceiling, but it also appears easy enough to raise at congresses convenience.

It is not uncommon for expensive legislation to propose an agenda of social justice, while the middle class is taxed and the wealthy and powerful are the beneficiaries. Coming posts will critique the bill in this light.

UPDATE [12/30/08]: While a major piece of legislation back in August, five months later the Hope for Homeowners Act has fallen in to obscurity with all the subsequent bailout legislation. There have been 321 mortgage applications for revision, and not one of them has been approved.

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