As you have likely already heard, late Wednesday afternoon, the House of Representatives passed H.R.3221, the Economic and Housing Recovery Act of 2008. The legislation, which was approved by a vote of 272-152, is also projected to succeed in the Senate, where it will be voted on next.
Some components of the extensive plan – such as refinance provisions and funding for foreclosed property rehabilitation – are largely controversy-free. Even President Bush, whose initial opposition to the legislation stemmed from objections to the $4 billion designated for the latter program, officially dropped his earlier threat of veto, thus all but ensuring that this bill will become law.
But the most drastic measure in the legislation, a proposed rescue arrangement for struggling government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, seems to have only drawn stronger and more widespread criticism as final approval of the bill moves from probable to nearly imminent.
Reader comments on a MarketWatch online article by Robert Schroeder focused on the taxpayer cost of the plan, which includes an unlimited line of credit to the GSEs for 18 months and authority granted to the Treasury to buy shares if capital is viewed as insufficient.
Although the Congressional Budget Office has stated that the emergency measures have a greater than 50% chance of going unused, the cost to the government – and, by extension, taxpayers – was estimated at $25 billion if the full provisions are ultimately needed.
‘I'm all for regulating lending standards. The 'license to print money' has to come with stipulations,’ writes one MarketWatch commenter. ‘However, bailing out investors with taxpayer money is an outrage. One more spin up on the hyperinflationary spiral. An economy with a government that borrows more and more money to maintain asset values is sowing the seeds for a market crash. Plain and simple. A free market on the way up with socialized losses on the way down is nothing short of reckless.
‘Let the natural price correction process begin already!’ the commenter continues. ‘Losses are never pleasant, but the aftermath will establish a foundation poised for healthy and solid economic growth.’
While admitting that the GSE rescue is probably still preferable to allowing Fannie and Freddie's fortunes to decline to the point of further ruin, another MarketWatch poster points out that this persistent rescue mentality may filter down to American consumers – many of whom had already caught the reckless spending and mortgaging fever.
‘Unfortunately, there is the 'moral hazard' cost as well as the taxpayer cost in the future,’ the reader notes. ‘The psychology of 'I'm not sure I can afford this…well, the government will bail me out.' How about a tax credit for anyone who has always paid their mortgage on time over the past five years?’
Despite the overwhelmingly negative response at MarketWatch, the plan is, of course, not without supporters. Many, including Treasury Secretary Henry Paulson, believe the symbolic weight of lifting such mortgage behemoths from the brink of failure could send a message both within the U.S. and around the world that a housing-market recovery is not some distant vision, but a reality beginning immediately.
The Mortgage Bankers Association (MBA) went even further: In a statement, Kieran P. Quinn, chairman of the MBA, called the bill ‘the most important housing bill in a generation.’
‘This legislation will do so much good for so many people,’ Quinn said, praising the bill's creation of a mortgage originator licensing system and provisions for encouraging low-income housing development as well.
Outside the financial industry, a recent USA Today blog post – identified as the paper's stance on the Fannie/Freddie issue – argued that the GSE rescue should not be viewed as simply a giant's government-orchestrated bailout at the expense of the consumer.
‘As distasteful as it might be, the single most important thing the government can do now is to assure that the financial system can continue to lubricate the economy. If businesses can't borrow, jobs are lost,’ the article points out. ‘If banks curtail home lending, housing prices would plummet further because prospective buyers couldn't find financing.’
Although the authors acknowledge the urgent need for greater oversight and the implementation of risk limits within the GSEs, they emphasize that right now is ‘not the time to stand on ideological purity. The bill would simply open lines of credit to the companies and allow the government to buy shares in them. Nor is it time to complain about the little guy getting a raw deal.’
– Jessica Lillian, Commercial Mortgage Insight
