Here's my understanding of it: I believe the 300bn number represents the total maximum value of insured mortgages. The process works something like this: a house is appraised today, using non-shady methods (i.e. the conforming rules). The bank writes down the mortgage to 85% of that value (the value today, post-crash). The FHA then insures that mortgage, which must be fixed rate, 30 year, non-shady. Moreover, the borrower will pay some amount of mortgage insurance.

Next, the borrower can't just flip the house -- you have to live in it, and when you sell, you owe the FHA a portion of the proceeds, pro-rated based on the time you're in the house. I think you can retain no profit if you sell in the first year, or something along those lines.

Finally, the rules on the mortgage qualification are pretty strict -- along the lines of 35% debt to income on a fixed 30 year mortgage.

So, 300bn represents the exposure if every single house the government backed using 85% of today's value ended up worth nothing at foreclosure.

There are many variables here in terms of total loss. If you think that the real estate market is due for greater than 15% collapse from today's appraised values, then the government might lose money. No one can really predict, though, since you're looking into the future. You're also dealing with more reasonable borrowers -- no dead people, no NINJA, only full documentation, strict DTI.

Overall, this doesn't seem like it will a) cost the government much if anything and b) actually help people or the economy out at all. I think it's a wash, and might not even help banks much (these are the customers with the best shot of not defaulting anyway).

I fail to see the constitutional authority for such a bill (and many like it, past and present.)

Since Congress knows no limits to its spend and borrow powers, such bills are always doomed to failure because it will require redistribution of wealth from local communities to pay for additional unauthorized congressional created debt and interest on a far greater scale then would been created locally.

I doubt that the bill could be that silly.

You're cute when you're naive.

This is Congress, after all....

(If "pro" is the opposite of "con" ....)

The only thing that could possibly make this bill sillier would be if it included my free pony. When will these Congresscritters listen to this citizen. I WANT MY FREE PONY!

We know that this plan will be cheap, because if there's one lesson from the housing boom, it's that it is never possible for someone with tens of thousands of dollars at stake to acquire a biased assesment of a house or of someone's ability to pay.

To use someone elses example:
Example

Home bought in 2005 for $200,000 — now worth $150,000. Loan is $200,000.

FHA plan

Borrower: Shows that he or she can afford a loan for 90 percent of the home’s value: $135,000.

Lender: Agrees to lower the principal of the loan by 15 percent of the reassessed value: $127,500 (a 36 percent loss).

Borrower: Monthly payment of $1,470 at 8 percent balloon rate falls to $875 at 6.75 percent fixed rate.

Or alternately, the lender sends the borrower a note saying "we think your house is worth $190k, sign this paper conveniently pre-filled-in with some assertions about your ability to pay, and your interest rate and principal will drop, significantly lowering your monthly payment, plus the loan will now be insured by the federal government so we won't need to forclose even if you do default! Since the bank is now dropping the principal by a lot less, and is getting the shiny federal guarantee, it's delighed to find an assesor willing to give the highest possible value. Given that a condition of the deal is that the house not get sold for a while, it'll be awfully hard to show that the assessor exagerated... So, the bank is happy and the assessor is happy to get a big pile of business from the bank; the homeowner just got their payments lowered noticeably, so they aren't going to complain; the FHA official whose job depends on maximizing the number of these loan deals that happen is happy...

Basically, we're establishing a system where every participant has an incentive to game the system in the direction that will shaft the taxpayer. And relying on the complete honesty of these participants, as demonstrated by the entirely ethical behavior of banks, assessors, and borrowers in setting up the very loans that led to this situation.

What could possibly go wrong?

" I doubt that the bill could be that silly."

It was written by our finest and most famous politicians in Washington, the very best money can buy.

Want to reconsider your statement ? :-(

The fact is, a system was allowed to perpetuate wherein people who couldn't REALLY afford to buy a house at all, were assisted in moving into $ 150,000 houses that were sold to them for $ 600,000, with no money down, ridiculously low payments, etc. This could only and obviously lead to failure.

Now, the taxpayers are being asked to bail out China, Japan, etc, who invested most of the money that Fanny and Freddy control. And to leave people in houses that they can't possibly afford, and to pay their mortgages for them.

Basically, it's the liberal version of part of the American dream - instead of 'everyone has the OPPORTUNITY for home ownership ( if they work hard, save, earn, improve their value and thus their income, etc ), it's 'The government will GIVE you one'.

Dittoing the thanks to AndyM.

From my totally selfish perspective, I hate this bill. I'm a young person who would love to buy property sometime in the next few years. This bill artificially inflates the housing market by keeping people in houses who are unable to afford them. Then it does so... by taxing me. Double ouch!