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Saturday, July 26, 2008

Senate Passes Housing Bill

by Calculated Risk on 7/26/2008 06:01:00 PM

From the NY Times: Congress Sends Housing Relief Bill to Bush

Here is the WSJ version: Congress Passes Housing Bill

First, I think the impact of the original part of the housing bill will be minimal. The provision allows the FHA to insure up to $300 billion in new mortgages for certain borrowers. The key is that the current lender has to voluntarily agree to write down the loan balance to 85% of the current appraised value before the FHA will insure the new loan.

The CBO has estimated that the FHA will only insure $68 billion in loans for about 325,000 homeowners. The number will be limited because only certain homeowners actually qualify, and also because lenders probably will not be eager to write down loans to 85% of the current appraised value.

My biggest concerns with this provision are appraisal fraud and adverse selection.

The other major provision of the housing bill is the Paulson Plan to support Fannie and Freddie. The cost to taxpayers is very uncertain, although I doubt it will be zero (the CBO's base case). The GSE support does appear to be almost unlimited (limited only by the debt ceiling that was increased to $10.6 trillion from $9.815 trillion).

The actual cost of the Paulson Plan is a huge concern.

There are many other provisions. As the NY Times mentions:

There are provisions, for example, that grant or extend Section 8 federal housing subsidy eligibility to residents of specific properties in Malden, Mass., and San Francisco. And there is a provision tailored narrowly for Chrysler to ensure that it can benefit from a corporate tax incentive even though the company is now structured as a partnership not a corporation. The bill does not name Chrysler but rather describes an unnamed automobile manufacturer “that will produce in excess of 675,000 automobiles” between Jan. 1 and June 30, 2008.

The bill also has a tax credit for new home buyers (up to $7,500). This appears to be structured as a no interest loan that has to be repaid within 15 years.

The bill has many other provisions too, including permanently increasing the conforming loan limit to 115% of the local area median home price (with a ceiling of $625,000, from $417,000), and eliminating FHA related Downpayment Assistance Programs (DAPs). Tanta and I have been advocating eliminating DAPs for years.

Note: I could have some of the specifics wrong - I've read several stories, and the details vary.

I think the bill doesn't match the heated rhetoric on the internets (I've seen people write this is the "end of capitalism" and the "dollar is doomed"). Although I'm sure some commenters will confuse me with Pollyanna!