Panicked Legislators Push Housing Bill
It is illegal to yell “Fire!” in a movie theater because people could be hurt in the ensuing stampede. For the same reason, it should be illegal for a politician to yell “Panic!” on the floor of the House or Senate. Taxpayers might get run over as politicians rush to spend billions of taxpayer dollars and then stampede to the nearest microphone to claim credit for solving the problem.
An example of this behavior is the Dodd-Frank mortgage bailout bill being considered in Congress this month.
With housing values falling fast, there is no doubt we have a downturn in the housing sector. The market is punishing imprudent behavior in the housing market, where folks who could not obtain car loans or credit cards were taking out home loans from banks all too willing to loan money. With little due diligence, both homeowners and banks made investments betting that housing prices would continue to rise forever.
This practice was unsustainable, and the market is correcting itself. At current prices, the supply of houses far exceeds demand, and prices will continue to fall until the market rights itself, as painful as that may be. Ignoring these market realities, a bipartisan legislative mania is underway to intervene in the housing market. As with most government fixes, the solution may be worse then the problem, as short-term political decisions have devastating long-term results.
The Dodd-Countrywide bill would create $300 billion in new taxpayer liabilities, allow banks to cherry pick and dump their worst performing and riskiest loans onto the FHA, and create a new annual tax of more than $500 million on the floundering GSEs to establish a permanent new trust fund that would be distributed to dubious community activist groups such as ACORN.
Also tucked into the bill is a provision that will require a variety of companies to report electronic sales to the government. Dodd-Frank would require credit card and electronic payment systems to report small business transaction volumes to a new government database, raising tremendous privacy and ethical questions. Just what is the government going to do with all of this newly harvested information?
In the long term, the Dodd-Frank bill creates systemic problems that may put the Federal Housing Administration at risk. For the first time in over 70 years, the FHA is operating at a loss and will require at least one billion dollars in direct support from the Treasury. Dodd-Frank would compound the problem at the FHA by requiring it to hold the $300 billion in high risk loans. Even worse, the nonpartisan Congressional Budget Office estimates that 35 percent of these loans will fail.
The new housing trust fund included in the legislation would increase the financial strain on Fannie Mae and Freddie Mac at a time when the federal government is considering a takeover of the failing GSEs. The levy must be paid whether Fannie Mae and Freddie Mac make a profit or not. Fannie and Freddie have seen their stock price plummet nearly 85 percent so far this year. This fall reflects weakening market conditions, but also capitalization questions and the fact that investors fear politicians will force Fannie and Freddie to make decisions based on politics, not market considerations. Ironically this would raise the costs for obtaining a loan from the GSEs, further harming the housing market.
As if the policy questions are not enough, the bill has also been surrounded by scandal since it was revealed that Senate sponsor Chris Dodd (D-Conn.) received a preferential VIP loan at rates not available to the general public from Countrywide, a lender that stands to benefit from the legislation.
With this many policy concerns and ethical issues surrounding the bill, why is it moving at legislative warp speed? The answer is that politics, not sound public policy, is driving the legislation. The Democratic-controlled Congress has little legislation to show for its time in Washington, and does not want to head into November without any significant legislative achievements. Even though a new Rasmussen Reports national survey shows that only 21 percent of voters support the mortgage bailout and the Congressional Budget Office believes the bill will have a negligible effect on easing the housing crisis, the same panic to simply do something, anything, that brought about the burdensome Sarbanes-Oxley “reform” threatens to create a new $300 billion taxpayer liability for little benefit to the economy.
Matt Kibbe is president of FreedomWorks, a national grass-roots organization dedicated to lower taxes, less government and more freedom.