Jeanne Sahadi over at CNNMoney.com recently gave this review of FHA and other govement backed loan bail-out programs:
NEW YORK (CNNMoney.com) — Lend a hand to distressed homeowners? No way, say many, who worry the tab will come out of their pockets as taxpayers.
Some proposals, it’s true, would be directly financed by taxes. For example, the Senate voted in favor of an appropriations bill that earmarks $100 million to provide housing counseling for those facing foreclosure.
But some proposals would cost taxpayers money only in a worst-case scenario.
The worst case for FHA and Fannie and Freddie
Taxpayer dollars, for instance, don’t directly support the Federal Housing Administration’s loan insurance program - the premiums paid by homeowners with FHA loans do.
But moves to liberalize FHA loan guidelines concern some because the government would presumably step in if the FHA stumbles after taking too much risk.
In the wake of the credit crunch, the agency instituted FHASecure to loosen guidelines to make more FHA loans available to homeowners in trouble. A modernization bill under consideration would allow the agency to insure bigger loans and loans with 0 percent down.
Those provisions would expose the FHA to more expensive and more risky loans. If too many of those loans fail, the thinking goes, the government would step in with taxpayer money.
“While the subprime market has witnessed considerable stress, the losses in that market are being borne by investors. Were these same losses to occur in FHA programs, it is likely they would be borne by the taxpayer,” said Richard Shelby (R-AL), ranking member on the Senate Banking Committee, in a July hearing.
Other proposals on the Hill focus on Fannie Mae and Freddie Mac. The agencies guarantee the purchase and trading of mortgages, which helps promote homeownership. Fannie and Freddie can’t buy loans valued above $417,000 and some proposals call for an increase in that limit.
Some proposals also call for higher limits on the amount of mortgage assets that Fannie and Freddie buy and keep in their own portfolio, and earmarking a portion of the raised limit for the purchase of subprime loans.
Fannie and Freddie are “government sponsored,” not government funded, but there is an implicit understanding that should Fannie and Freddie falter, the government would feel pressure to help out.
“As a purely legal matter, it’s not required to. But it’s bailed out private companies before,” said Patrick Fleenor, chief economist for the Tax Foundation, a nonprofit research group that advocates for lower taxes.
