Saturday, July 5, 2008

Washinton Post: Vital Part of Housing Bill is Brainchild of Banks

We've touched on these subjects in the past, but as we get many new readers I like to revisit them and add new data. Back in April [Apr 4: Congress is Rushing to Help Homeowners Out!! (Not)] I pointed out how the wonderfully cute and fuzzy "Foreclosure Prevention Act of 2008" - which sounds like a wonderful thing for consumers - was in large part simply a program that mostly benefited banks and homebuilders; two of the top 10 lobbyist groups on the Hill. Think Washington D.C. is a broken model that can't get anything passed? Think again - the homebuilder lobby basically said we are going to suspend contributing to campaign coffers and not more than 60 days later they received their gift - the new bill. And ta-da, the spigot of campaign contributions suddenly turned back on. And that kids, is how a bill gets passed in this country.

Now let's move on to the latest handout... err bill. Well as the Washington Post reports, it's basically built on the back of a proposal by Credit Suisse and then Bank of America. Completely unbiased sources of course. I've typed in the past about how much risk is being thrown onto the back of Fannie Mae (FNM) and Freddie Mac (FRE) (who are now absorbing about 70% of the country's mortgages, up from 40%ish in the past) and as the banks offload risk to the Federal Reserve and these 2 entities (which are pseudo government arms), the "socialization of risk" away from the banks and onto your backs grows. Because if these fail, that means your money is going to pay for it. While the banks laugh about it in the corner. [Apr 15: Could the USA Lose its Triple A Rating?] How are those 2 entities doing? Just fine thanks for asking.
  • In a sign of continuing trouble in the housing market, mortgage delinquency rates doubled over a 12-month period at Fannie Mae and Freddie Mac, the two industry giants reported yesterday.
  • Neither company's figures fully captured the problems borrowers have had making payments, because they excluded loans for which payment terms had been relaxed.
  • After years of hand-wringing about the risks that Fannie Mae and Freddie Mac's rapid growth might pose to the financial system, the government has loosened restraints on the companies in the stated hope that they will help prop up the housing market.
But back to "how dysfunctional government works"
  • A key provision of the housing bill now awaiting action in the Senate -- and widely touted as offering a lifeline to distressed homeowners -- was initially suggested to Congress by lobbyists for major banks facing their own huge losses from the subprime mortgage crisis, according to congressional staff members and bank officials.
  • Credit Suisse, a large investment bank heavily invested in mortgage-backed securities, proposed allowing hundreds of thousands of homeowners to refinance their mortgages with lower-cost government-insured loans, relieving financial institutions of the troubled debt. After the bank proposed this to Congress in January, it became known as the "Credit Suisse plan" among congressional staffers and lobbyists. It later formed the basis of housing provisions in both the House and Senate.
  • Bank of America, which is acquiring Countrywide Financial, the country's largest mortgage lender, followed with a similar and more detailed proposal, principal negotiators on the legislation said.
  • But the measures would allow financial institutions to get cash out of foreclosed properties that would otherwise sit on their books as dead weight.
  • Since the new loans would be guaranteed by the Federal Housing Administration (FHA), taxpayers would ultimately pay for defaults. The Congressional Budget Office projected that this could cost $1.7 billon over five years.
  • Still, critics expressed disappointment that banks were given such a large hand in writing legislation designed to ease a foreclosure problem they helped create.
  • "It is ironic that Congress, responding to a crisis that was created in large part by irresponsible lending, would produce a bill, the main beneficiaries of which are likely to be those lenders," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group. "There are aspects that work hugely to the banks' advantage." (yes "ironic" isn't it?)
Cramerica. For the corporation; by the corporation. We're only along for the ride.

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