There’s always something to howl about.

HR 5830: Here Comes The Bailout Act of 2008

The best thing about being suspicious of politicians is that you learn how they think.  I actually think this is a GOOD idea.  Libertarians will hate it but I think this bill has merit.

Remember my Bailout Post, in March?

I have a little idea about how to save the American real estate market.

Let’s start with the premise that lenders are taking 20-30% hits on short sales. Then, let’s have the US Treasury loan 30% of the balance, of the aggregate debt, to homeowners whom request it, in order to pay down the first mortgage (or second mortgage). If I have $200,000, in aggregate liens against the property, the US Treasury will lend me $60,000, to pay down those aggregate liens, to $140,000. This reduces the lenders exposure.

What type of loan will the Treasury make to homeowners?

The term can be for the lesser of:

1- the remaining term of the first mortgage

2- 65 less the age of the primary borrower.

The interest rate can be the corresponding term treasury rate, plus .5% (for administrative costs). Maybe we can use some of that “yield spread” to coerce a few mortgage brokers to “originate” this government debt (okay, that was completely self-serving). For a 42 year old, with a 27 year term on his first mortgage, the term of this new government loan (in second position) would be 23 years (65-42=23). If a 23 year treasury bond yields 4.1%, than the note rate for the new loan will be 4.6%.

Well, maybe the Members of Congress are reading Bloodhound Blog; it wouldn’t be the first time that happened.  Bryant Tutas reports on HR 5830, on Active Rain:

From what I’ve read, and understand, this Bill will give distressed Homeowners an opportunity to refinance with FHA at 90% of value IF their current Lender will agree to a short payment.

One of the caveats is that the FHA will own a piece of the action. When the borrower sells they will either pay, from any profits, a 3% exit fee (a percentage of the original loan amount) to the FHA or a declining percentage of any net proceeds, attributed to appreciation, (from 100% in the first year to 50% in year 4 or after) whichever is larger.

I guess this FHA participation, in the appreciation, is to prevent speculators and second homeowners from participating. This Bill is designed specifically to keep folks in their homes

I DO like this bill.  The current market is crazy.  People are walking away from homes because they “bought at the top”.  While bubble bloggers will say, “That’s what the banks get for being stupid”, that attitude is quite dangerous.  A whole generation of home buyers is breaking the moral code of paying back what you borrow and that IS scary.  It’s scary because it sends a message to banks that FICO scores are not an accurate measure of “character”.  If banks can’t determine the character of the borrower, they’ll default to asset-based lending and require hefty down payments, like they’re doing today.

This isn’t a bad bill.  Lenders are getting clobbered through foreclosures.  If we can get the borrowers to sit still, we may arrest this decline.  Philosophically, it stinks.  Pragmatically, it’s brilliant.  Love ’em or hate ’em, we gotta live with the banks.  We gotta get them to start lending.