Font ResizePRESIDENT BUSH RELUCTANTLY signed into law what is perhaps the most aggressive federal housing measures since the New Deal. There was no ceremony and no members of Congress were present at the signing.
The lack of enthusiasm is understandable. The law authorized the federal Treasury, aka taxpayers, to rescue the huge mortgage firms Fannie Mae and Freddie Mac should they be threatened with collapse.
These companies own or guarantee almost half of America's $12 trillion in mortgages. Proponents of the rescue bill argue that it is needed to give investors some confidence in the mortgage market and to prevent a bad foreclosure situation from becoming worse.
They have a point. Without the legislation, Freddie Mac and Fannie Mae would be in far worse shape.
Also, the housing law could help up to 400,000 homeowners pay off troubled mortgages, replacing them with affordable government-insured loans. However, lenders would have to agree to take a considerable loss by reducing the principal of each loan before it is refinanced. That is how the loan becomes more affordable.
Under the new legislation, the Federal Housing Administration is allowed to insure up to $300 billion in refinanced loans.
The Congressional Budget Office estimates that less than $70 billion is likely to be used because of the reduced principals and the requirement that the original lenders pay up-front fees into an
Despite the lower principals and mortgage payments, the CBO predicts that more than one-third of the newly refinanced loans will be in hot water again.
How much the new legislation will cost taxpayers is unknown. If all goes well, taxpayers may not have to suffer any losses. But the budget office recommends the federal government prepare for a $25 billion expenditure over the next two fiscal years.
Some financial experts believe the law is misguided and that unlike the Chrysler loan guarantees in the 1970s, there is no upside for taxpayers. Chrysler paid back its loans with interest.
The authors of the housing law believe it is the best way to stabilize the housing market by putting a floor under declining prices.
If the law provides some degree of confidence in Fannie Mae and Freddie Mac, it could be beneficial. But it is not likely to solve mortgage problems for the majority of homeowners.
The oversupply of homes is apt to continue to lower or at least keep prices down for some time. That is a good thing for buyers, who will be in a better position to afford mortgages on more reasonably priced homes, and for lenders who can be more confident that borrowers will have the ability to pay.
Market forces, not federal legislation, will over time correct the housing crisis. It's the "over time" part of the equation that bothers lenders, buyers and investors. But even if the new housing legislation is as positive as its authors envision, there is not going to be any quick fix to such a massive economic upheaval.
