The Greatest Housing Bill Ever... NOT!

I don't know about you, but I was so excited to hear that today, Congress passed a bill providing real help for homeowners facing forclosure and serious measures targeting the housing crisis. I knew better than to be excited, because I went through the same thing with last year's FHA mortgage assistance excitement, just to be seriously crushed when I found out I didn't qualify, because my loan had it's first adjustment more than 3 years earlier.

So I read everything I could on today's "landmark legislation" with both excited hope and a jaundiced eye: Maybe this time, *I* could get some help.

I will warn you right now is a VERY long "I'm on a soapbox!" rant....

First off, this "unprecedented" bill is "regarded as the most significant housing legislation in decades." That's a lot to say, considering it's only going to cost us taxpayers SEVERAL HUNDRED BILLION DOLLARS. But hey, if it helps stop people from losing their homes, I'm all for it.

Now, Lord Knows there are a lot of good, hard-working people who may lose their homes this year through no direct fault of their own, the actions of unscrupulous lenders, and various other factors. Sure, quite a few simply made a bad decision buying a house they really couldn't afford. But I can't help thinking: shouldn't the lender said NO?? Hasn't anyone heard of the phrase, "improvident lending?" Hey, they LOVED saying NO to me when I struggled to get a mortgage back in 1999! (That's a long story for another day) Still, the fact of the matter remains that serious and tough actions need to be taken NOW to prevent as many foreclosures as we can, because by doing so, we shore up the entire industry (not that some of them deserve it...), we shore up fast-falling property values, help keep schools open, reduce job losses within the industry and related industries, reduce the risk of more tax-payer funded bank-bailouts, and lots of other "trickle-down" effects, from reduced business failures to solvent municipal water districts.

It is NECESSARY to enact serious help for those facing foreclosure. Absolutely NECESSARY to our economy, it's not just feel-good politics.

So here's what our Congress has decided to do:

• Direct $3.9 BILLION to neighborhoods negatively affected by foreclosures to buy forclosed houses, so they can fix them up and resell them.

Gee... now why would a bank have any incentive to MAINTAIN a house they own? They can just let it run down and let the community buy it, I'm assuming at the amount owed and/or current fair market value, which greatly reduces the lender's risk and potential loss but increases the community's cost. While I agree that many neighborhoods are suffering drastically falling property values, (my own neighborhood has suffered an average 36% drop in value - !!!), many towns are suffering blight and increased crime due to empty, boarded-up houses, and lots of other problems due to foreclosures, I cannot help but feel that this is the wrong approach because it could be used to INCREASE foreclosures.

Why would mortgage companies bother working with homeowners to help them work their way out of potential foreclosure, with plans such as loan modifications and forbearance programs, when they can instead foreclose as soon as legally possible knowing that the community can buy the house from them quickly? This money is available, with NO INCENTIVE on the mortgage company to avoid foreclosure.

Frankly, about the only incentive mortgage companies have right now to work WITH homeowners facing foreclosure is the possibility that the home will sit empty, deteriorating and losing value for months, if not years.

Besides, $3.9 BILLION ain't nearly enough.

As far as I can tell, this money places no requirements or responsibilities on the foreclosing lenders. There doesn't seem to be any sort of requirement that they, for example, sell the property at a DISCOUNT to the community. Or that they have made good-faith efforts to work out an agreement with the homeowner BEFORE foreclosing. Or that they subsidize, and/or pay a portion of, the rehabilitation work, which would be less than the amount that they would eventually have had to pay in the form of reduced sales price and/or actual repairs when a buyer eventually came along.

I can see some unscrupulous leaders of some communities using the funds to buy homes, repair the homes, them sell them to favored fellow citizens (council members?) at far below market value...

Why not ear-mark that money and give it to communities to, for example, increase police coverage, cover short-falls in school tax revenues due to reduced populations, or any other option in direct need of the community. By earmarking that money solely to buy foreclosed homes is just opening up a can of worms, from increased foreclosures to potential political corruption.

Regardless, the mortgage industry is now guaranteed that up to $3.9 BILLION dollars work of foreclosed properties can be easily sold without a lick of work on their part and no apparent safeguards against abuse on the part of politicians and other unscrupulous community leaders.

I wonder how the realtors feel about all those potential lost sales commissions ...

Bottom line: This money does NOTHING to help even one homeowners facing foreclosure NOW

• The Bill "requires lenders to show how high a borrower's payment could get under the terms of his mortgage. " Um... isn't that already a LAW? You know, like the TRUTH IN LENDING Regulation, amongst other laws and regulations? Maybe I'm wrong...

• The bill includes an additional $15 BILLION for the Low-Income housing tax credit and providing a tax credit up to $7,500 for first-time home buyers for houses purchased between April 9, 2008, and April 1, 2009.

Okay, now that sounds good... maybe....

Let's look at the Low Income Housing Tax Credit first.

Now, a little about how it works. Be forewarned, this is way over-simplified. It provides a dollar-for-dollar tax credit to those who build housing, primarily rentals, that agree to set-aside at least 20% of their units for low-income renters. The low-income housing tax credit is a tax credit used overwhelmingly by partnerships, corporations, and investors, and directly reduces their cost (read: increases their profit) of developing (mostly rental) housing.

In these set-aside units, rent cannot exceed 30% of a person's income. There are set income levels. For example, here in El Paso County, the maximum income for a one-person household is $14,300. To put that in perspective, a person making the current Colorado minimum wage of $7.02 an hour, 40 hours a week, 52 hours a year, would earn around $14,600... too much to qualify for one of these rentals. A family/household of 6 persons can have a maximum income of $23,650 for a 6-person household.

Now, why a household that is SIX TIMES larger can only earn about 40% more - less than double - the income of a one-person household defies logic. And we're supposed to be so family-friendly....

So how is this supposed to help homeowners facing foreclosure NOW??? That money won't work it's way into the system for several years, as it's going to mostly directly benefit developers building NEW DEVELOPMENTS, at least a few years away from signing their first leases?

How does this STOP even ONE family from losing their home NOW to foreclosure? All I see is it increases the possibility that more low-income RENTAL units will come available a few years from now...

This will, on the other hand, help those folks over at Fannie Mae, a major developer and investor in rental properties... lots more taxpayer money available for them to subsidize their costs of developing more RENTAL properties ....

Bottom line: Honestly, overall, I believe increasing the low-income housing tax credit is a great idea for future low-income RENTERS, a great idea to encourage increased developments of low-income housing. The problem is it is a lousy idea for homeowners NOW. It does not help a single HOMEOWNER facing foreclosure RIGHT NOW. It does nothing to stabilize the housing market NOW.

Let's take a look at that $7,500 first-time homebuyer credit... wow... that sounds GREAT!! Until you realize that it is a TAX credit. IT IS NOT DOWN-PAYMENT ASSISTANCE.

The credit has to be taken over two years, and is MAXIMUM $7,500, as it adjusts downward for incomes over $70,000 filing separately/$140,000 filing jointly. The credit can ONLY be used by those who bought/are buying a house between April 8, 2008, and April 1, 2009.  Gotta love a tax credit that is only good for one year, and ends on April Fool's day... :)  (Note:  Some reports state it is through April 1st, 2009, others July 1st, 2009... I need to clarify this but will use the April 1 date for now.)

I'm no tax expert... but what about those families who qualify for a mortgage based on their income, but after their standard, child care, mortgage interest, health care, and other income tax deductions end up owing zero taxes? Do they still get to take the credit?

The credit has to be paid back (no interest) over 15 years, and becomes "due" if you sell the home (or it stops being your primary residence) during that 15-year time period. Since most Americans change homes on average every 7 years, people could find themselves with a nasty tax surprise a few years from now when they upgrade or downsize their homes...

If you didn't think filing your taxes was already complicated enough, imagine the fun of calculating how much you have to pay back six or seven years from now, remembering to budget that into the sales price of your home when you resell it, seeing a smaller tax refund every year for the next 15 years because you are paying back a tax credit you barely remember taking...you get the picture.

Frankly, I have a real problem with a tax credit that helps a very limited number of people for a very limited time, that DOES NOT STOP EVEN ONE foreclosure NOW, and is likely open to abuse by some mortgage brokers out there. I can see them finding some way to twist this into a way of boosting your income and/or down payment "on paper" to help you qualify. You know, like the way some college financial aid officer's use the Hope and Lifetime Learning tax credits to increase your income and reduce your financial aid eligibility....

While it is true this could help increase sales of houses until next year, how does this help homeowners facing foreclosure NOW??? How does this help someone who has already lost their home buy another, more affordable home - since if you've owned a home within the last three years, you are NOT a first-time homeowner! And WHY limit this to such a short time period?

• The Bill allows some homeowners struggling to make their payments refinance into lower-cost government-backed loans (read: Fannie Mae loans).

The Bill specifically targets those who are upside-down on their mortgages - meaning owe more than the house is worth. Of course, there are some strings attached: You have to show you can AFFORD the new loan, and the current lender has to agree to take a loss on the old loan. I'm assuming the logic behind this is the loss would be less than the lender's cost of foreclosure. This is expected to help about 400,000 homeowners. On top of that, the maximum loan limit will increase to $625,000, and permit Fannie and Freddie to support mortgages on properties priced up to 15% higher than the median price level in some geographical areas.

Okay. Let's put Fannie Mae at risk of losing EVEN MORE money.

For starters, lenders holding mortgages with PMI (primary mortgage insurance) on them have zero reason to agree to take a loss. All they need to do is foreclose and file a claim with the PMI, greatly reducing their loss, if any. I doubt this will help anybody facing foreclosure who is paying PMI with their mortgage.

Secondly, WHY would a bank agree to take a loss, when they know that thanks to the $3.9 BILLION grant, they could just foreclose and sell the house to the community, likely getting back every penny that's owed?? Lenders are loath to work with homeowners as it is; it can be a real struggle to get them to accept a short-sale, now Congress expects banks to jump at the chance to take a loss? Yea, right... did they forget banks have stockholders and high-paid executives to protect?

Seriously, though, this WILL help some people, but just like last year's big homeowner assistance program, it's not going to help many. In fact, thanks to last year's grand plan to save homeowners, Fannie Mae's 2007 Annual Report states they helped 100,000 homeowners "avoid foreclosure OR refinance out of sub-prime loans." The emphasis is mine.

I doubt this is going to help much more than another 50,000-100,000 people, since the requirements on this are more restrictive than last year's program and, in fact, underwriting guidelines have tightened up. And last year, banks weren't required to agree to take a loss.

Although it could also have a "trickle-down" effect, possible slowing down the speed at which property values are dropping.

Still, at least the potential exists that someone can save their home. That is a good thing.

• The bill allows the Treasury Department (read: taxpayers!) to lend UNLIMITED amounts of money to Fannie and Freddie, or buy their stock, until the end of the year. Hrm... the Treasury Department has an OPEN checkbook to bail out Fannie and Freddie and keep them afloat?

Gee, I'd like just one page out of that checkbook!

Of course you are thinking it's important to keep Fannie and Freddie solvent. You're right: it is. The problem is there is no onus on Fannie or Freddie to change a thing in exchange for the sweetest line of credit ever offered to any corporation.

I can sum up the real problem with one word: Executives.

-Thomas A. Lund, Executive Vice President of the SINGLE-FAMILY MORTGAGE BUSINESS at Fannie Mae - where the majority of Fannie's losses/potential losses from foreclosures are found - will be compensated about $3.9 MILLION for the year. Plus stock options, of course.....

-Michael J. Williams, Executive Vice President and Chief Operating Officer, will "earn" compensation of around $5.6 MILLION.

-Daniel H. Mudd, President and CEO, will receive compensation of around $12 MILLION this year. For particularly enlightening reading, be sure to read the transcript of an interview with Daniel H. Mudd included in Fannie Mae's Form 8-K, filed with the SEC on July 18th, 2008. Pay attention to his responses to questions regarding executive compensation. http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=5781517&format=PDF

- Beth A. Wilkinson, Executive Vice President-General Counsel and Corporate Secretary. Nice to see a women up there with the big boys. Ms. Wilkinson can expect compensation around $3 MILLION dollars this year.

- Robert J. Levin, Executive Vice President and Chief Business Officer, will "earn" around $7 MILLION this year.

-Peter S. Niculescu, Executive Vice President of Capital Markets, will also "earn" around $3.9 MILLION in compensation for the year.

-Stephen M. Swad, Executive Vice President and Chief Financial Officer, about $3 MILLION.

Just in case you are curious... non-management members of the Board of Directors, you know, the people WHO DETERMINE THE PAY of the executives, receive around $500,000 a year in "cash retainer payments." Let's see... board members, specifically the "Compensation Committee," get $500,000 a year JUST in "cash retainers" then decide how much these executives are worth paying each year, as the company loses BILLIONS this year, as the stock value has plunged, as millions of taxpayers chip in to keep this company afloat....

Hey, next time you need a non-management board member, call me!! I'll do it for a measly $100,000 cash retainer!! :) Heck, I'd probably do it for $40,000! Either way, it'd be a huge raise for me! :)

Anyway, you get the idea. These people are the brains of Fannie Mae. They are the ones who make all the decisions, determine the direction of the company, determine policies, budgets, sales and purchases of business assets. They are the bosses of the bosses.

They are the ones responsible for ensuring the corporation's profitability, much less survival. Frankly, they've done a piss-poor job. If I hear one more time that it's because of the "unexpected" downturn in the housing market, that it's due to an "unexpected" increase in foreclosures, or any other inane comment about how it is the ECONOMY'S fault that Fannie is knee-deep in the mud, I'm going to puke. Seriously.

These are not only the brains of Fannie Mae, they have their fingers on the pulse of the entire housing and mortgage industry! If there is trouble on the wind, these people are going to know it AGES ahead of time, far enough in advance to take preventative action. Besides, the downturn in the industry has been in the news for almost two years, progressively getting worse until all heck broke out this year. To say that "nobody" could have predicted this is beyond ridiculous (see Mudd's interview - seriously, read it, it'll turn your stomach).

Anyway, just those SEVEN people have a combined income of $38.4 MILLION annually. To put that in perspective, that's equivalent to 2,630 full-time minimum-wage earners.

I'm offended by this. Not the fact they got paid so much - big executive paychecks are common - but the fact they are STILL getting paid so much when they've done such an apparently piss-poor job.

I don't know about you, but when my income goes down, my expenses go down. Other than going to Golden Corral to celebrate my finally graduating from college, I've not eaten out in 6 months. I haven't been to the movie theater in 8 months. I haven't rented a movie in 6 months. I've switched from Coca Cola to Kool-aid and just plain water.

I have NOT bought a gallon of milk in THREE MONTHS.

And these "professionals," these EXECUTIVES are pocketing huge bucks for aiding and abeting the near demise of their company, then getting the taxpayers to pay for their mistakes and poor judgement???

When my income goes down, my expenses go down. Lots of corporations follow that same common-sense approach to handling their finances. Why hasn't Fannie Mae?

Whatever happened to the concept that if you make bad decisions that cost the company money, you lose your job! In case you forgot, it's called "pay for performance." You know the concept: If you don't perform, you don't get paid.

Just in case you are curious, here's another really "sound" financial decision on the part of the wonderful leaders of Fannie Mae: They are LOSING MONEY BUT STILL PAYING DIVIDENDS to their stockholders. Sure, it's only 35 cents a share right now... last year it was 40 to 50 cents ... but hey, it's not like they are LOSING MONEY or anything! Only $2.2 BILLION in losses for the first three months of 2008.... Guess they have to compensate the stockholders for the major drop in the value of their shares from last year's $60.00-$70.00 to the current $12.00 a share....

For the record: Fannie Mae paid out $503 million in dividends on "outstanding shares of preferred stock" last year, while losing money. Thanks to an unbelievable complex, 160+ page annual report, I've no clue how much they paid out in common-stock dividends. Easily millions.  Maybe tens of millions.  Maybe hundreds of millions.  And honestly, I don't really know the difference between "preferred" and "common" stock.

Paying dividends to stockholders when you are losing money.  That's offensive.  Maybe not to the stockholders....

Why the heck is this company, which is losing money and apparently doing NOTHING to balance their budget except borrow MORE money (read: get FURTHER in debt)allowed to borrow UNLIMITED amounts from the Treasury? Hey, have you ever tried to get new credit (or a credit line increase) right after you missed a payment or two on a credit card? Real fun, NOT! But these bozos get to borrow all the money they want....

Here's another word for you: Lobbyists. Fannie (and Freddie) spend big bucks on LOBBYISTS. Tens of millions, easily. Now isn't that special? Borrowing money from the Treasury to pay lobbyists to go to Capital Hill and strike deals with the powers that be to grant you even more tax breaks, unlimited credit lines, and other special treatment.

Grrr...

Don't get me wrong, I do believe that we MUST keep Fannie and Freddie solvent. It is NECESSARY. The ramifications of either of those corporations failing is simply beyond imagining. The negative impact on the overall economy would make the price of oil back-page news. The cost to taxpayers would be immense... easily in the trillions, making the Iraq war seem cheap. I just have a problem with helping these government-backed, private corporations without asking for anything in return, especially in the nature of true reform, sensible compensation, reduced spending, and the application of some simple, plain common-sense business practices, like linking executive pay to corporate performance, cancelling stock dividends, reduced/no spending on lobbyists, etc., until they are profitable again, amongst other things.

I being overly simplistic here, but if they did just these few obvious things, they would easily slow down the bleeding. Who knows... maybe they could even get back in the black.

I wonder if they are using CFLs and low-flow toilets... could save them a ton in utility expenses... :)

The bottom line is Fannie Mae, like most of us, is the cause of most of its own problems.

• Before you think the bill is just one big fat pork barrel, it DOES have some funds set-aside to DIRECTLY help homeowners facing foreclosure: $180 million will be made available to help fund pre-foreclosure COUNSELING for homeowners facing foreclosure.

Yea, that's millions, not billions. To put this in perspective, Fannie Mae paid out $323 million MORE in preferred stock dividends than the Government is setting aside for pre-foreclosure counseling.

Note the key word there: COUNSELING. In this case, that's providing information to homeowners facing foreclosure about their rights and responsibilities. Something that is ALREADY provided through HUD-approved housing counseling agencies, many of which CHARGE homeowners ($25-$75 on average) for advice and, if my own experience is any example, are incapable of doing anything you couldn't do for yourself by simply calling your mortgage company, talking to their loss mitigation department and asking for assistance. Still, if you are facing foreclosure, you SHOULD call one of these HUD-approved housing counselors, because you WILL learn a lot about your RIGHTS.

Never, ever, ever forget one simple fact about the world we live in: NOBODY will protect your rights if you don't. Knowing your rights is ESSENTIAL.

Well, I've vented, ranted, logiced, rambled, and dragged this on much longer than it needed to be. The bottom line is simple: Once again, the government has passed "landmark" legislation that will end up being nothing more than another run-of-the-mill boondoggle. It will help a few thousand people, and maybe, just maybe, it may help stabilize the housing, mortgage and credit market somewhat. But to call this legislation anything other than a major taxpayer-funded corporate salvage job is misleading, to say the least.

If you are facing foreclosure, you MUST read this: http://portal.hud.gov/portal/page?_pageid=33,717348&_dad=portal&_schema=PORTAL Follow the knowledge and advice on that page.

Sources for this rant are: Fannie Mae's 2007 Annual Report http://www.fanniemae.com/ir/pdf/annualreport/2007/2007_annual_report.pdf Yahoo! News Article: "Congress Approves Housing Bill." http://news.yahoo.com/s/nm/20080726/bs_nm/fannie_freddie_dc_30