President Bush indicated yesterday that he’ll veto bipartisan compromise legislation that Congress may embrace this morning because the bill would ostensibly bail out lenders. Problem is, the president’s fuzzy math shows that it is the administration’s alternative plan that in fact bails out lenders.
The compromise legislation that the Senate Banking Committee will probably agree on this morning would help responsible homeowners and foreclosure-blighted communities cope with the rapidly spreading housing crisis. Under this plan, responsible at-risk borrowers would be given the opportunity to refinance into a safe, fixed-rate mortgage guaranteed by the Federal Housing Administration after the lenders and investors holding the original adjustable-rate mortgage took a significant hit.
Not so, under the president’s plan. Here are the numbers.
Under the Senate proposal, lenders, investors, and their mortgage service companies who choose to participate in the program to refinance borrowers into FHA loans would need to write down the current mortgage to 90 percent of the current value of the property and pay a 3 percent insurance premium to the FHA up front. They would also have to cover the closing costs of the new mortgage, not to exceed two percent of the loan amount. After the writedown, the holders of the original mortgage would get a guarantee on the new mortgage (equal to 90 percent of the property’s current value) for a fee of 5 percent.
For that guarantee on, say, a $225,000 loan on a property now worth $200,000, the holders of the original mortgage would take a $45,000 loss on the original loan and pay fees of $10,000 to the FHA to guarantee the new $180,000 mortgage. A $45,000 loss plus $10,000 in fees is no bailout for lenders, but the president’s alternative plan certainly looks like one.
FHASecure, the administration-endorsed lending program, also allows a borrower to refinance into a new FHA loan. But under the president’s plan, the existing lenders and investors holding the loan would only need to be willing to write down the value of the existing loan to slightly more than 97 percent of the current value.
What’s more, there is no origination fee or closing costs to be paid by the existing mortgage holders for a new and more secure FHA-guaranteed mortgage. The upshot: On the same $225,000 mortgage on a property now worth $200,000, the lender would take no more than a $31,000 loss, pay no fees, and still get a government-guaranteed mortgage.
So let’s review the president’s fuzzy math. An FHA program guaranteeing lenders and investors 85 percent of the current value of a property originally worth $225,000 would cost them $55,000 in losses. Bush calls that a bailout. But an FHA program guaranteeing lenders upwards of 97 percent of the current value and costing them only $31,000 is not.
Someone in Washington who’s better with numbers—perhaps Federal Reserve Board Chairman Ben Bernanke or Federal Deposit Insurance Corp. Chairman Sheila Bair—should explain the math to President Bush. Both Bernanke and Bair understand the seriousness of the housing and credit crises still haunting our economy, as does a bipartisan majority of Congress.
That’s why the legislation before Congress today is so important to an economic recovery from the ongoing Bush slowdown. The president should not be threatening a veto. He should be adding up the costs of inaction under his own plan.
Andrew Jakabovics is Associate Director for the Economic Mobility Program at the Center for American Progress. For more information on the Center’s housing policies, please go to the Housing page on our website.