Dean Baker: The Foreclosure Prevention Act (a k a the Bank and Builder Bailout Act)

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The Foreclosure Prevention Act (a k a the Bank and Builder Bailout Act)
By Dean Baker
t r u t h o u t | Perspective

Monday 07 April 2008

Conservatives used to complain liberals always wanted to throw money at problems. While there may have been some truth at times to this charge, Congress decided to literally take this path in its approach to the housing bubble last week.

There are many villains in the story of the housing bubble, but the homebuilders and the mortgage industry would go on almost everyone's list. The homebuilders rushed ahead with new developments under the delusion the bubble would last forever. The result is an unprecedented glut in housing.

The mortgage industry aggressively promoted adjustable rate mortgages to the most vulnerable segments of the population, giving us the subprime crisis. They didn't care mortgages couldn't be paid because they could dump them into the secondary market almost immediately after they were issued.

During their spring recess, members of Congress heard from angry constituents who feared the loss of their home or the loss of much of their home equity due to plunging house prices. This prompted Congress to rush into action when it came back into session last week.

The centerpiece of the "Foreclosure Prevention Act" approved by the Senate is a tax break for the homebuilders and the mortgage bankers - in effect throwing taxpayer dollars at two of the industries most responsible for the housing bubble. That should satisfy troubled homeowners.

But this may not be the end of it. There are plans for a large-scale buyout of bad mortgage debt. There are several different proposals being circulated, but the basic story is the same. The government would guarantee new mortgages that would be used to buy up existing mortgages of homes facing foreclosure. While the new mortgages would be issued at prices that are less than the value of the original mortgage, they will almost certainly give the banks far more money than if the market was left alone. ......(more)

The complete piece is at: http://www.truthout.org/docs_2006/040708C.shtml