Friday, August 31, 2007

First Cut on GOP's Housing Proposals - Not On the Mark, Not Far Enough

The first cut of the expected Bush-GOP speech on home lending reform today is that it appears to leave out at least one key aspect of improving 'the system'.


The Ogre of Bankruptcy

It goes back to the GOP's bankruptcy reform, which tried to address issues with abuse of bankruptcy, but may have created as many problems as it sought to solve. Some of the problems, however, are much older, see Bankruptcy Laws Contributing to Foreclosure Epidemic:

The amendment [to existing bankruptcy laws] disfavoring protection of the debtor's principal residence was added at a time -- 1978 -- when home mortgages were nearly all fixed-interest rate instruments with low loan-to-value ratios and were rarely themselves the source of a family's financial distress. As a result, bankruptcy law singled out the home mortgage loan as the major debt for which the bankruptcy court is powerless to provide relief, they said.

Crisis ?= Opportunity for Needed Structural Reform

So far, no indications that the GOP's bill-of-fare attempts to stimulate the housing market by proposing actions that will increase the amount of decent, affordable housing, rather than just offering insurance subsidies for ever larger and more expensive homes, that are beyond the reach of a great many who could really benefit net national savings in the long run by purchasing a 'starter home'.


Reforming the FHA has been on the legislative table from earlier this year and is not new (see S.1805, and H.R. 110-217. I don't know why there are two versions in the house.
H.R.1752 and H.R. 1852).

Senator Schumer's bill creates something called a 'high-cost area', which would bring FHA money, possibly, into New York. The worth of that creation seems debatable.

The other changes - from a brief look - appear to center on accepting less cash down in favor of a higher initial insurance premium to the FHA, raising the limits on borrowing, and extending the terms of loans out to ... 40 years. (40 yrs is a slight 'improvement', maybe 7% increase in payment affordability, buttressed by a longer expected working lifespan).

"Limits" ought to be formulaic, based on the ratios of some variables and so forth. Putting discretion on limits into the hands of a non-economic model is ... politically inadvisable.

Writing more insurance during a crisis seems like a stupid idea on face value, but one hope is that more FHA insurance could help some people off of crazy-bad private loans and onto something more stable.

I don't think that charging more insurance for an ARM is the way to go, frankly. A better model would be to require higher income-to-payment ratio from the borrower, i.e. more capacity to bear the risk of an ARM, rather than that they pay a premium to mitigate a mis-estimate of the same during ... what else, foreclosure (ug!).


This is a good idea. It may well help with loan work-outs and even foreclosures. However, care must be taken (obviously) not to create a loophole for professional real-estate investors to increase their speculation(s) and for wealthy people to overpay now so that they can get a tax-shelter later.

Personally, I don't think it would be easy to write this kind of legislation. It might take a fairly long while to get all the angles down pat so that it was 'good legislation' out the door.

No comments: