Over the weekend, Congress gave final approval to the housing relief bill that is aimed at helping thousands of struggling homeowners avoid foreclosure and to temper falling home prices. It also includes provisions to assist institutions that operate in the mortgage market, namely the Government sponsored enterprises (GSE) Fannie Mae and Freddie Mac. The cost of this bill, despite other proposed funding options, will be funded primarily by the American taxpayer over the long term and in particular those of us who are financially fit. That is people who have not got in over their heads and are effectively managing the debt they have. It also covers people who have taken the efforts, sometimes sacrificing other wants and luxuries, in order to be timely on their income tax payments, debt obligations and to ensure they enter loans they can afford. So if you are in the “financially fit” category, like I am, you should be annoyed at having to bail out the rest of broke America. I understand that some people are genuinely distressed, but the vast majority got themselves into this mess through financial ignorance or mismanagement.
Here are the main financing elements of the housing relief bill where I see a lot of potential for failure and fallout:
– $300 Billion towards refinancing of mortgages for 400,000 distressed borrowers. The reason a lot of these families got into these “sub prime” loans that they couldn’t afford was because they didn’t quality for the regular 30 year loans in the first place. It also places a lot of pressure on already struggling lenders who have to take a lower loan value and share profits with the government. The cost from these losses will be passed onto to the “good” financially fit borrowers who will see their taxes and cost of their financing go up. Also, even if 400,000 homeowners can avoid foreclosure — a figure that a few critics dispute — some estimates put the number of potential foreclosures from 2007 through 2012 at up to 6 million. So this bill is like creating a fishing safety net, when you trying to catch sharks in the ocean.
– $25 Billion for the GSE’s. This makes their government backing explicit, rather than implicit, and gives them support in the eyes of Wall street that they have a funding source to get through the housing crisis. They currently do not need this $25 billion line of credit, but if they do (in the event of a worsening of the housing market) and because they are too big to fail, we will then have a real taxpayer funded bailout of a major financial institution and the cost will be much more than $25 billion over the long term. Some critics say the legislation goes too far in propping up Fannie Mae and Freddie Mac and shielding lenders.”The new law will actually encourage lenders to be even more reckless,” argues Peter Schiff of Euro Pacific Capital. “The government is telling lenders not to worry about the loans they make, because if borrowers do not repay, the government will.”
– Raise the federal debt limit from $9.8 Trillion to $10.6 Trillion, an $800 billion increase. Bascically giving the treasury a green light to freely spend (waste) tax payer funds to save sinking ships. This will raise our national debt and continue to weaken the US dollar. We all know how good (not) the government is at spending tax payer money in times of crisis (Katrina hurricanes, Iraq War, lack of a energy plan etc)
– Provides $180 million for financial counseling and legal assistance to help families stay in their homes (to be distributed in grants by NeighborWorks, a national non-profit). I thought this counseling had been going on for the past year, yet the crisis continues to worsen with more people caught up in it. The problem is falling house prices and past predatory lending practices where loans where given to people who could not afford them. Counseling will make people aware of their options, not forestall foreclosure. Unless the loan servicing companies participate in assisting distressed home owners, this is just wasted money by the government.
– Refundable tax credit for first time home buyers (10% of the purchase price, up to a $7,500 credit). This is good for those prudent folk who waited to buy a house or bought a house in the last few years that they could afford. However, if it is just used by people as a deposit or collateral to buy a house that can’t really afford, then you know where we will be back to! Up to 3 million buyers could be eligible for the tax credit, according to the National Association of Realtors. “It’s something that will help, but I’m not sure it will make a substantial difference,” says Joel Greenberg, CEO of Novadebt, a non-profit consumer credit counselor. “A lot of people are sitting on the side, unable to move, because there are so many obstacles, such as not having sufficient credit. You have the obstacle of the concern that something you buy now will lose value. A $7,500 tax credit isn’t going to do it.”
– $500/$1000 Standard Deduction in Property taxes, for joint/single filers. This will probably end up resulting in higher property and local taxes down the line to recoup the costs.
– $4 Billion grant to states to buy foreclosed properties. States will be allowed to buy and rehabilitate foreclosed properties. The funding had been opposed by the White House, which said it would benefit lenders, property vultures and not homeowners. I agree as these rehabilitated people will be sold to astute property investors for a substantial discount and not to people that really need the housing. The “states” are basically playing “flip that house”.
The bill is also looking to raise $18.5 billion in revenues by requiring credit card companies to report more information to the IRS about credit card transactions, a move designed to force merchants to more accurately report their income. This will result in added costs to credit companies and merchants, which they will of course pass onto consumers in some form like higher fees or credit transaction costs. Another source of funding the bill is from the GSE’s – but they are going to have enough monetary challenges of their own to really provide much funding in the short to medium term, which leaves the American taxpayer as the main source of funding. Why isn’t there an additional tax or penalty on the financial institutions that got many homeowners into this mess through their financial trickery in the first place?
Apart from a short term slowing of the current housing market crisis and credit crunch, the bill will only delay the inevitable downward spiral. Unfortunately the American and global economy is heading into a recession, not out of one. So the housing bill, like the stimulus checks, will only have a temporary affect. The government again is trying to spend us out of an economic crisis, which is unlikely to work and only add to our national debt and the continued devaluation of the US dollar.