Secretary Paulson’s three page “bailout bill” has now morphed into the 110 page “Emergency Economic Stabilization Act of 2008.” A remarkable amount of hard work and good thinking has gone into the bill and it is now before the House and, soon, the Senate, apparently under rules that prohibit amendment.
The expectation is that it will pass overwhelmingly (or not at all). At lot is being written about it and there will be much more to write about it in the coming months and years. At this point, keep in mind that this is just the beginning of what will occupy the housing community for years and years to come. We are at the beginning of an unprecedented effort which will remake the federal role in housing for years to come. It can have a remarkably positive impact on the affordability of housing in the
The next steps, after the bill is enacted and signed into law by the President, likely to occur this week, are the rules and programs. There are a host of things to watch, depending on your perspective, but two are especially critical for the housing community:
Section 101(d) PROGRAM GUIDELINES.—Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following:
(1) Mechanisms for purchasing troubled assets.
(2) Methods for pricing and valuing troubled assets.
(3) Procedures for selecting asset managers.
(4) Criteria for identifying troubled assets for purchase.
These program guidelines are the heart of the matter. Which assets are purchased, how they are priced, and who does the buying, will control a) how effective the program is in stabilizing the credit markets in the short term (which, after all, is supposed to be the whole point of this mammoth exercise), and b) how much the taxpayers are likely to lose – or make – in the years to come.
What assets are purchased is also central to the ability of the Treasury to stabilize the housing markets. If random tranches of mortgage-backed securities and the securities built upon them (like CMOs, CDOs, SIVs, etc.), are acquired, the Treasury may not have sufficient ownership of mortgage pools to direct the servicers to modify mortgages in default in lieu of foreclosing. Focusing on acquiring enough securities to control a pool will create far greater impact on the housing markets by giving the Secretary the freedom to modify hundreds of thousands of mortgages in default, saving these homeowners from foreclosure and their communities from serious decline.
This leads to the other key provision (and the many related to it):
(a) RESIDENTIAL MORTGAGE LOAN SERVICING STANDARDS.—To the extent that the Secretary acquires mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
This is the plan that can stabilize the housing markets and actually help get the economy back on its feet in the long term. It might also recast the federal role in housing by coordinating the FHA, Ginnie Mae, Fannie Mae, Freddie Mac and the Federal Home Loan Banks to both stabilize housing markets and create a new federal housing finance system that makes ownership and rental housing affordable to working families of all incomes.
So now, as this effort begins, is the time to pay very close attention to what the Treasury does with its soon-to-be acquired extraordinary powers and funds.
John K. McIlwain is chairman of NHC’s research affiliate the Center for Housing Policy, and a senior resident fellow at the Urban Land Institute where he holds the ULI/J. Ronald Terwilliger Chair for Housing. Prior to joining ULI, McIlwain served as senior managing director of the American Communities Fund for Fannie Mae, and was president and CEO of the Fannie Mae Foundation.