In the Wall Street Journal editorial on the new housing bill is this ominous paragraph:
Likewise, the bill’s $300 billion to refinance and insure distressed loans through the Federal Housing Administration will supposedly cost just a few billion dollars. That assumes few homeowners and lenders will sign up for the program because lenders will have to take a 10% haircut to be eligible. If no one needs this program, why is it there? If lenders do take advantage, they’re bound to dump their worst loans on the feds. So as with the Fan and Fred bailout, the FHA guarantee will be either superfluous or much more expensive than we’re led to believe.
From this account, I can’t tell exactly what the bill provides. Perhaps a knowledgeable VC reader can decipher the exceedingly complex statute.
Could this bill really allow banks to get the FHA to guarantee all its worst loans at 90% of their original value, even loans worth only a half or a third of their original value? Then if the homeowner defaults, the bank gets paid and the homeowner still loses his or her home. I doubt that the bill could be that silly.
$300 billion is a lot of money, representing over a quarter of all US income tax receipts in 2005.