Titles given bills in Congress often hide the legislation's real purpose. That's certainly true of the Foreclosure Prevention Act of 2008 recently passed by the Senate, which implies it would save homeowners facing mortgage default. A more accurate title would be the Taxpayer Bailout of the Greedy Housing and Mortgage Industry Act.
Democrats, in particular, should be ashamed of this legislation, considering how they chastised the Bush administration for bailing out Bear Stearns. Indeed, the bill's main author, Sen. Chris Dodd, D-Conn., acknowledges it doesn't live up to its name but hopes it will be improved in the House. That's hardly a ringing endorsement.
The only current homeowners who would be directly helped by the Senate bill would be returning war veterans — and then only a little. Soldiers would get relief from interest rate increases for a year, and a lender looking to foreclose would have to wait nine months instead of the normal three to file. That's small reward for such a sacrifice.
Otherwise, the Senate gives the big breaks to the housing and finance industries. Homebuilders and other businesses that made out like bandits during the housing bubble would be allowed to take a belated tax write-off of current losses on those profits — a gimme worth $25-billion. So the ones who helped bring about the subprime mortgage collapse would be rewarded. Brilliant!
Next in line are the renewable energy producers, who would get a $6-billion tax cut. What does that have to do with the current housing crisis? Nothing. It's just another sop to the people who hire lobbyists.
Future home buying would be encouraged with some provisions, but that would do little to help a homeowner facing foreclosure now. Buy a house already in foreclosure and you would get a $7,000 tax credit (and bail out the lender). Local governments would get $4-billion to fix up abandoned properties. None of that would help families who have already been kicked out of their homes. For them, a meager amount in the bill would provide credit counseling.
While the House hasn't finished work on its bill, preliminary proposals would at least help homeowners facing foreclosure because of rising adjustable-rate mortgage payments.
Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee, has a particularly bold (and expensive) plan. He would commit $300-billion to help homeowners who are delinquent on their mortgage payments avoid foreclosure. Basically, it would work this way: A delinquent homeowner could ask for a new FHA loan that would pay off the lender at a discount to the balance due, and the mortgage payments would be lower.
A controversial part of Frank's plan is that the new mortgage would be for 90 percent of the home's current value. That would give applicants instant equity in the homes, unlike similar owners who have made their payments but seen their home values decline. That could exacerbate the problem if those owners stopped making mortgage payments to get the same deal. Frank proposes rules to discourage purposeful delinquency or quick profit-taking by those who are helped out.
The House plan needs more debate to ensure it does more good than harm. And the $300-billion cost will only add to the federal debt, with the bill coming due to all taxpayers in the future. But the way forward should be clear enough.
The House should reject the Senate's bailout of the corporate opportunists who brought about this crisis. If the House fails, President Bush should follow through on his threatened veto of the Senate bill.
Then, the House should consider measures along the lines of those spelled out by Frank that actually help deserving families. To live up to its title, a bill should prevent unnecessary foreclosures rather than enrich corporations.