The bill would prevent foreclosures, create affordable housing and revamp oversight of two of the mortgage market’s biggest players: Fannie Mae and Freddie Mac.
"Everyone can claim a victory," Dodd said Monday evening. A key measure in the bill would allow the Federal Housing Administration to insure $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers’ homes.
The funds would be paid by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).
Dodd said Monday that the compromise bill would still create a fund to spur affordable housing but would use the funding for that program in the first year to backstop the FHA mortgage program.
The new FHA program could benefit an estimated 500,000 people, according to Dodd. If it turns out the costs fall below that level – that is, should few if any borrowers default on their new FHA loans – the funds from Fannie and Freddie would be redirected back to the affordable housing trust fund.
Pending legislation in Congress, aimed at assisting homeowners faced with foreclosure, will now clear the Senate Banking Committee. This paves the way for important relief, and will help create a bottom in home prices.
Why This Is Important
The pending legislation is an important incremental step in the government response to the housing problem. Most investors do not understand or accept the incremental nature of government action. Astute observers realized that bold strokes were necessary.
Doug Kass wrote about the need for a "Marshall Plan" for housing in a recent Columnist Conversation post. In an earlier article on RealMoney, I pointed out the challenges of political leadership. I wrote that a strong President might have used the State of the Union Address to highlight a comprehensive plan, and lamented that this would not happen.
Instead we have seen the typical government patchwork:
- Legislation to make sure that forgiveness to homeowners was not taxable. Assistance to homeowners through the FHA.
- Increasing the conforming loan limit so that "jumbo" loans could be handled by Fannie(FNM – Cramer’s Take – Stockpickr) and Freddie(FRE – Cramer’s Take – Stockpickr).
- Relaxing the capital restrictions on Fannie and Freddie. Increasing the powers of the Federal Home Loan Bank and authorizing additional lending.
- The Fed — lowering rates, and initiating programs to accept more varied collateral from banks and investment banks.
- And now, if the current proposal is passed, some direct relief for those threatened with foreclosure.
At some point, the incremental government steps accumulate into something resembling a comprehensive plan.
Strong Voices Agree
Doug Kass, who has been prescient on the nature and extent of housing problems, has identified the current legislation as important — both on this site and on his frequent contributions on Kudlow & Company.
Jim Cramer has taken a different approach, but one that is equally helpful. He comments on the micro-economics of the housing situation. If the sense of a major overhang in foreclosures is reduced, it may encourage buyers who are concerned about instant losses from their purchases.
A Senate agreement pushed Congress significantly closer toward a bill that would expand the federal government’s role in propping up the housing market. After weeks of negotiations, Democratic Sen.
Chris Doddand Republican Sen. Richard Shelbycompleted a plan Monday that would allow the government to insure up to $300 billionin refinanced loans for struggling homeowners. The agreement would also overhaul supervision of Fannie Mae and Freddie Mac , the enterprises that provide the lion’s share of funding for U.S. mortgages. Also, Fannie Mae and Freddie Mac’s ratings were taken off review for a downgrade by Standard & Poor’s after the rating company affirmed the ratings of Freddie Mac and lowered the risk-to-the-government ratings on Fannie Mae .
Derivatives brokerage firm
MF Global Ltd. (MF) confirmed it received a $300 millionbackstop commitment from a J.C. Flowers & Co. affiliate to buy equity- linked securities of the company. MF Global said the equity commitment will serve as the foundation of the plan to refinance the company’s $1.4 billionbridge loan established in conjunction with its initial public offering last July. Additionally, the company swung to a fiscal fourth-quarter loss of $71.1 million, or 59 centsa share, from a year-earlier loss of $76.1 million, or 73 centsa share, hurt in part by a loss on exchange seats and shares. Adjusted earnings were 48 centsa share.
Staples Inc. (SPLS) reported a 1.5% rise in fiscal first-quarter net income as the office-products giant issued a cautious outlook for the current quarter amid expectations for "the weak economic climate to continue throughout 2008."
The lead Republican on the Senate Banking Committee, Sen. Richard C. Shelby (R-Ala.), expressed optimism that a new financing arrangement agreed to Monday would attract more support from his Republican colleagues, who have voiced concern about any measure that could be seen as a government bailout of speculators.
"My primary consideration during negotiations on this package has been to protect the American taxpayer, and I believe we’ve made significant progress toward that goal," Shelby said in a statement.
Some Republicans have supported other versions of the legislation, citing the severity of the housing crisis and the escalating number of foreclosures in some regions of the country, including parts of California. They argued that the foreclosure crisis would damage entire communities and pull the economy toward recession.
But other Republicans argued against any government assistance, saying it would reward borrowers and lenders who made bad decisions out of carelessness or greed.
Shelby was considered a key player because he belonged to the latter group. "I’ve long said that we should do what we can to help struggling homeowners, short of asking the taxpayer to foot the bill," he said Monday.
White House reaction to the emerging deal was muted. In public comments, Bush did not repeat his previous veto threat, saying only that "we look forward to working with Congress to get a good piece of legislation to my desk that helps our fellow citizens and helps us get through this housing issue."
The Senate plan announced by Shelby and Banking Committee Chairman Sen. Christopher J. Dodd (D-Conn.) is similar to the House-passed bill in that the centerpiece of each is an expansion of government mortgage insurance. Under both proposals, a borrower facing foreclosure could refinance into a government-guaranteed mortgage under certain conditions, including that the home is the owner’s primary residence and that the holder of the existing mortgage accepts 85% of the home’s current appraised value as payment in full.
The House bill calls for using about $1.7 billion from the federal budget to set up the program, which would be administered by the Federal Housing Administration.
Under the Senate deal, the start-up funds would come instead from an affordable-housing fund capitalized by mortgage giants Fannie Mae and Freddie Mac, which were created by the government but are owned by public stockholders.
"This legislation is good news for both the markets and homeowners," Dodd said. "The bill addresses the root of our current economic problems — the foreclosure crisis — by creating a voluntary initiative at no estimated cost to taxpayers, which will help Americans keep their homes."
Dodd told reporters the measure would speed the correction of housing prices to return stability to the market as soon as possible and prevent further damage to the broader economy.
"Obviously, we want to keep as many people as possible in their homes. But the second goal, as important as the first, is to get to the floor" of the housing correction, Dodd said in a conference call. "Until we get to the floor, none of this is going to get better."
White House spokesman Tony Fratto said the administration would look carefully at the plan once it was formally approved by the Senate Banking Committee, which it could do as soon as today.
"We want to ensure that FHA expansion is done in a responsible and effective way," Fratto said.
The legislation also would create a new oversight structure, long sought by the administration, designed to ensure that Fannie Mae, Freddie Mac and the Federal Home Loan Bank system remain financially sound.
Other aspects of the House version of the legislation, including tax credits for first-time home buyers and federal support for mortgage counseling, were to be taken up by the Banking committee today.
"We have a lot of confidence that this is what the market is waiting for," Dodd said.