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Sunday, July 27, 2008

Bailing Out The Banks

Congress passed the "mortgage rescue" bill that will help 400,000 home owners, but is really a benefit for banks and Freddie Mac and Fannie Mae.

Unfortunately the President doesn't have the guts to veto it, due to the bad publicity he'd get for it, and that would go to the GOP during an election cycle.

The bill is definitely a contradiction. On one hand 400,000 "at risk" home owners could get bailed out IF their banks are willing to take a loss on their loans and refinance them through FHA. If everyone takes that deal, taxpayers are on the hook for 300 BILLION dollars in new loan guarantees.

However, the bill also gives nearly 4 billion in grants to banks to rehab foreclosed properties to get them ready to sell. In other words, the bank gets two choices, take a loss and refinance, or get a grant after foreclosure to repair the house and resell it; hopefully at less of a loss.

The block grants, opposed by Bush and the GOP are an issue. Banks generally stay out of the real estate business as much as possible. In most cases, when possible, they'd rather work out a short sale, or refinance instead of foreclosing so they don't have to deal with the inevitable problems associated with holding a home. This bill gives them as much an incentive to foreclose as it does to refinance, possibly more since the government is willing to mitigate part of their loss under the block grant program.

Freddie and Fannie also get sweet deals, with the Federal Reserve being able to loan them basically unlimited amounts of money over the next 18 months to help shore up their poor loan portfolios. Yes, they get some extra oversight (finally), and have to pay for some new programs, but on the whole, it's a big wet kiss for getting in over their heads with risky loans.

Who loses in the bill? The tax payers, that's who. We get put on the hook for hundreds of billions in new loans through FHA, and hundreds more by tossing cash at Freddie and Fannie. While Congress sees this as "doing their job" the truth is both the GOP lead congress and the one run by Democrats fell down on their jobs by not having some of the new protections in place previously. They were too busy rolling around in the cash that was coming in from a housing driven economy to look at how wobbly the foundation was.

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