Weighing Housing Bail Out’s Cost And Effect

May 13th, 2008

By weighing housing bail out’s cost and effect it is seen that the tax payer will lose $1.7 billion to save only 325,000 borrowers out of the clutches of foreclosures. In all there are 3 million borrowers in the foreclosure net. Thus only a small fraction will benefit. However the cut from the pockets of the taxpayers will be less than what had been previously calculated.

Barney Frank (D-Mass), the chairperson of the House Financial Services has been the initiator of these proposals that were passed by the House by 266/154. 39 Republicans joined in the affirmative group. But Bush government is annoyed, as are many leaders from the Republican camp. Thus the smooth passage of the bill comes under a cloud.

Chris Dodd (D-Conn), chairperson of the Senate Banking Committee has a similar proposal that will soon be voted upon by the committee. It would empower the Federal Housing Administration to guarantee new loans if the lender agrees to reduce the principal loan amount. It must not be more than 85% of the current appraised value of the unit. It is argued that by doing so the lenders would gain more than if they plodded through the expensive, time and energy consuming process of judicial foreclosure. It is reported that there are nearly 2.8 million house owners burdened with sub-prime mortgages with floating interest (ARMs). The Dodd plan will greatly help these to work out plans that would be more realistic and affordable. Since both lenders and borrowers benefit, the net result will be a check on vacant properties that are dotting the country like ugly infested sores.

As per the legislation $3000 billion will be set aside for FHA refinancing of loans. But the calculations are that only 28% of the $3000 billion in loans will be brought back on rails. Only 325,000 house owners will actually benefit and be able to avoid foreclosure. Close to a million will be halted on the tracks from help because of second mortgages and also because the lenders might not agree to trimming down the principal loan. Other reasons dogging the steps of the hapless borrowers are unemployment, medical bills and divorce. This coupled with price rise of essentials makes it impossible for borrowers to continue with mortgages even after modification. Then there are costs involved to avail of government guarantees. The latter too comes with a tag. If the house is later sold for a profit then the gains will have to be shared with FHA.