Congress’ massive mortgage bailout

What happened

In an effort to prevent the total meltdown of the housing market, Congress has enacted a massive federal bailout to protect homeowners from foreclosure and shore up the giant mortgage lenders Fannie Mae and Freddie Mac. The 694-page legislation, signed into law by President Bush this week, is designed to help struggling homeowners trade their skyrocketing adjustable-rate mortgages for cheaper, fixed ones. The number of households facing foreclosure has more than doubled from a year ago, and officials said the bill may save 400,000 home­owners from going into default. “We sent a message to American families that help is on the way,” said Senate Banking Committee Chairman Christopher Dodd.

Bush initially threatened to veto the legislation because it includes a plan to give local communities $4 billion to buy and refurbish foreclosed properties. But he agreed to sign the bill after Treasury Secretary Henry Paulson persuaded lawmakers to add the provisions bolstering Fannie and Freddie, the privately owned but government-sponsored corporations that hold or back half of all U.S. mortgages. The final bill extends an unlimited line of credit to the mortgage giants. It also creates a regulatory agency to oversee the companies.

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What the editorials said

No one likes a bailout, said The Economist, but Fannie and Freddie “were simply too big to fail.” The Congressional Budget Office says that simply unrolling the safety net could be enough to restore the market’s confidence in Fannie and Freddie, and taxpayers won’t have to pay a dime. But it also says they could end up paying $25 billion or even $100 billion. Ominously, the bill raises the federal-debt limit by $800 billion to $10.6 trillion—just in case. “In the short term the rescue may have averted financial apocalypse. Over the longer term the price could be steep.”

If Fannie and Freddie are too big to fail, said The Wall Street Journal, they ought to be cut down to size. Unfortunately, the companies’ new appointed overseer will have to “run a gantlet of confirmation and congressional hazing.” Since Democrats blocked an amendment to prohibit Fannie and Freddie from spending millions of dollars on lobbying and campaign contributions, you can be sure the companies will use the next few months to buy themselves an awful lot of political goodwill. In the end, the mortgage giants will remain as giant as ever.

What the columnists said

By intervening in the free market, said Lawrence A. Hunter in National Review Online, “the government, as usual, is going to make matters a whole lot worse, not better.” Under the current system, banks know they can’t easily resell foreclosed properties for a profit, so they’ve actually been seizing fewer homes than they probably should. But thanks to the $4 billion grant for states to buy up foreclosed properties, banks now have an incentive to go ahead and kick people out of their houses after all.

This bill is better than nothing, said Paul Krugman in The New York Times. But ultimately, it’s just one more attempt to hold the financial system together “with bungee cords and masking tape.” The system broke down because lenders knew they could make billions in risky loans to unqualified borrowers, and then sell off those loans “to investors who had no idea what they were buying.” It was a game of “heads I win, tails you lose.” If the government is going to stand behind the entire mortgage and banking industries, “those institutions had better be carefully regulated.”

Instead of regulating the mortgage brokers, said James Surowiecki in The New Yorker, perhaps we should just get rid of Fannie and Freddie. The companies were created decades ago on the theory that they lower mortgage costs for first-time home buyers. But research shows they have minimal effect. “Given everything else we could be spending taxpayer money on, does the government really need to be in the mortgage-buying business, too?”

What next?

Some homeowners should be able to refinance their mortgages at better rates almost immediately, but no one is predicting an end to the housing crisis anytime soon. Analysts say housing prices will probably drop at least another 10 percent before hitting the floor. “This legislation will not perform miracles,” said Dodd.