Criticism of the mortgage bill passed last week by the House focused on prospects for federal money potentially helping to bail out speculators or some overextended borrowers who put themselves at risk.
But the bill is less risky to taxpayers than its critics claim, requiring substantial new accountability by affected borrowers and lenders alike. And it also goes much farther than simply bailing out borrowers at risk of foreclosure, by substantially reforming regulation of the Federal Housing Administration and the two big government-sponsored enterprises that finance mortgages, known as Fannie Mae and Freddie Mac.
Prior to the vote last week, Federal Reserve Chairman Ben Bernanke had endorsed the bill’s approach, while not endorsing any particular legislation.
The bill would allow the FHA to refinance up to $300 billion worth of mortgages, preventing what the Congressional Budget Office estimated to be about 500,000 foreclosures. The cost in subsidies to the government would be about $2.7 billion over five years.
But most of the responsibility would fall to borrowers and lenders. The bill would enable borrowers, with mortgages higher than the value of their properties, to refinance them by requiring borrowers to write down the value of the mortgages in exchange for the government guarantees. It is an approach that has worked before with limited cost to the government, while preventing foreclosures and the economic and local blight problems that often attend them.
The bill isn’t perfect. Some of the mortgages in question are indeed the result of poor decision-making by property owners or even lost gambles by speculators.
Yet this also is a systemic problem affecting the entire economy. Bernanke and other experts believe that intervention will improve the overall situation for the long term, and that should be the objective.
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