New Housing Bill Will Not Stabalize Home Prices


Yesterday in a special session the Senate passed the Housing Economic Recovery Act of 2008, H.R. 3221, with a 72 to 13 vote. This measure received such overwhelming bipartisan support so politicians could point to this legislation and say, “We are doing something to mitigate the foreclosure crisis”.

They aren’t.

This bill once converted to law with President Bush’s signature next week can’t and won’t do a thing to stem the drop in home prices which is what home owners and landlords need desperately. But with over 1.5 million households in foreclosure and elections in November, politicians did what politicians usually do…too little, too late.

I found the perfect quote to describe this new bill…

“Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.” – Groucho Marx

Grouch had H.R. 3221 in mind when he made that statement. This bill is nothing more of a blank check to the Treasury Department to bail out the GSEs, Fannie Mae and Freddie Mac. Sure the Democrats slipped in a $5 Billion measure allowing states to buy and repair foreclosure properties. However, you and I both know this money will never reach the market in time and it’s a drop in the bucket anyway.

Paulson pushed hard for this legislation for the last 2 weeks telling every Congressman who would listen how our national credit worthiness with the world was at stake…our honor no less. It just goes to show how ill-equipped Congressmen are to spot a conman in action. Since when does bailing out two of the most profitable NYSE traded companies in recent history a national priority?

Paulson now has the power to grant unlimited credit to the GSEs and the power to buy their stock directly. This over-reaching power has never been given to the Treasury. The GSEs, especially Fannie Mae, are known for accounting scandals, huge campaign contributions to Congress, and multi-million dollar incentive-based compensation packages for top executives.

This is how we want to spend tax payer money?

Wall Street firms can’t seem to determine the extent of the subprime damage in their own portfolios, so how is Paulson going to it at the GSEs? The bad loans buried in the mountain of GSE owned debt – over $5 Trillion – could easily be well over $100 Billion at Fannie Mae alone.

My guess is this new law will cost the tax payers over the next few years about $200 Billion and not one dime will stop the slide in home values. Not one dime will go to help a family save their home from foreclosure which would help stabilize home prices.

Groucho…when you’re right, your right.

About Author

Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog,, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.


  1. FHA is the hot product now since they still approve less than perfect credit. Bernanke has warned against turning FHA into the dumping ground for bad loans, but I fear that’s exactly what’s happening.

    Well hear in a few years how we have to bail out FHA with a $100 Billion as well.


  2. Yea Mike…here’s the language…

    “(Sec. 113) Increases from 3% to 3.5% of the appraised value of a property the mortgagor’s required cash (or equivalent) investment (downpayment). Prohibits any funds for such cash investment from: (1) the seller or any other person or entity benefiting financially from the transaction (seller-funded downpayment assistance); or (2) any third party or entity reimbursed by any of such parties.”

    Finally and end to “non-charity charities” funneling seller paid down payment assistance driving up prices unnecessarily.

    Shame on the NAR for blocking this when HUD tried it a year ago.


  3. The analysis that you have done of the real estate market over the time period is very useful to forecast the upcoming growth trends in the real estate market. This is the very same thing that is being done by Waco Home Lenders. As you pointed out correctly, tthe real estate market was a bit slow to start of this year, but it is gradually gaining momentum.

  4. Ya your completely right! I read its only aimed to help 400,000 people and when you read the actual bill it says something about clearly all liens but the first. Do you think all the banks will equity loans are just going to lay their hands down. I DONT THINK SO !!! Talk about ASININE ! I apologize for my rant.

  5. Jeff:

    You make a logical argument; however, in a market with falling prices banks would be foolish not to take the FHA insured loan even if it meant a significant write-down on their assets. The reason being is with the new FHA insured loan they could then value the assets on their balance sheet and would know the amount of capital necessary to keep in their reserves. The biggest problem right now is that banks do not know how much capital reserve is needed, so they continue to raise capital to cover the falling values of the assets on their balance sheets. With the new FHA insured loan they would now have a solid value that their assets could not fall below and would know how much capital is needed in reserves. By knowing this they would then be able to lend more money. This will cause more liquidity in credit markets which in turn directly affect mortgage markets and ultimately real estate markets.

    Yes, the tax payer will ultimately pay a portion of the bill. However, as an economist I can tell you the alternative for our economy is far worse (i.e. letting markets wash out the bad loans). As a real estate investor this is where we are able to make our money one only has to look back to the saving and loan crisis of the 1980’s to see how you can make money on government bail outs of large financial intuitions!

  6. Cliff,

    A washing out of the bad loans and bad borrowers is exactly what we need…and fast!

    This “death of a thousands” cuts …put folks who should never have been given a loan, are now in foreclosure…sadly should let it happen…let their home hit the market after the bank gets if back…and allow someone with some sense turn it back into a performing asset.

    The idea that converting a bunch of subprime borrowers to FHA borrowers is good for the economy is the same mentality and tactic the Japanese used…and it got them 20 years of stagnation.

    S & L crisis …bad loans done by banks…banks go under…Uncle Sam takes over banks…liquidates remaining assets at 10 cents on the dollar…whole thing over from start to finish 4 years…cost to taxpayer 140 Billion….

    The way we are headed on this one…bad loans done by banks, Fannie, Freddie, Wall Street firms,….a few go under…most get bailed out…Uncle Sam created bail out programs for everyone…one at a time…including borrowers who will eventually get foreclosed on anyway…whole thing drags on for 7-10 years ….cost to taxpayer $1 Trillion dollars…cost the economy of 10 years of stagflation…unknown.


  7. Rob I could not agree with you more if we had the same type of financial systems as we did during the savings and loan crisis or even in the late 1990’s. However, given today global financial markets the “tough love” risk is far greater; because no one really understands how all these markets are tied together across the world. It is good for shifting risk but, equally as good for spreading a nasty credit crisis.

  8. James Wheelock on

    The prevention of declines in home values that overshot is not and should not be the goal in any legislation. We must have a housing correction to regain the health of the economy. This bill is not what I would call the magic bullet, however, it does have points that will help keep the credit markets moving while thngs return to the mean. If we do not have the government sanctioned companies stay afloat it will spell disaster to the world economy. And those that feel the most pain will not be the wealthy or the financial banks. It will be the average American.

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