Even before the Federal Reserve cut the Federal funds rate by 50 basis points on Sept. 18, President George W. Bush stepped in front of the White House press corps and offered his prescription for housing and the mounting number of foreclosures.
Bush, who appeared in the Rose Garden on Aug. 31, began by suggesting that the disturbance in the subprime mortgage market was “modest—modest in relation to the size of our economy.”
Bush went on to outline his plan to modernize the FHA to allow it to insure more loans, help lenders reduce down-payment requirements, and increase loan limits. Bush also promoted the FHA-Secure program to help people refinance with FHA-insured mortgages.
Bush talked tough about mortgage lenders, saying that the White House would issue new regulations to force mortgage brokers to be more transparent, and he promised to bring to bear the full weight of HUD, the Department of Justice, and the Federal Trade Commission on any unscrupulous lenders.
The day after the Fed cut the Fed funds rate, the Office of Federal Housing Enterprise Oversight (OFHEO) announced it was loosening standards for Fannie Mae and Freddie Mac, which, in addition to their roles as government-sponsored enterprises charged with insuring home loans, help funnel funds to bankers and lenders. Each organization will be given more flexibility in determining the number of loans it purchases, as well as in accounting for the loans. Both Fannie and Freddie have pledged to purchase tens of billions of dollars worth of subprime mortgages over the next several years.
Also in September, Treasury secretary Henry Paulson testified to Congress that he could support allowing Fannie and Freddie to purchase and securitize jumbo loans (loans above the current $417,000 limit) on a temporary basis.
In further attempts to ease the mortgage morass, the House of Representatives and the U.S. Senate Banking Committee have passed the Expanding American Homeownership Act of 2007, the legislation to reform the FHA. The bill awaits the approval of the full Senate.
The question remains, will all these changes, proposed or real, make any difference?
“That's going to [depend] significantly on the ability of the Senate to put politics aside and get something done,” says NAHB CEO Jerry Howard. “The burden right now falls squarely on the Senate's shoulders.” But even if the Senate does act, “the burden at the next FOMC [Federal Open Market Committee] meeting will be placed back on the Fed governors again, and we'll have to wait and see what they do,” Howard says.
Giving Fannie and Freddie more leeway in the wake of accounting scandals in recent years may not be the most palatable idea for the government, but the other choice is even less appealing, says John Burns, president of John Burns Real Estate Consulting in Irvine, Calif.
“It's a lot riskier to let the economy go into the tank led by housing,” Burns says. “It sounds to me like Congress really understands that this could be a tremendous blow to the economy, and I don't know any incumbent congressman who wants the economy to blow up in an election year.”
Even if Fannie and Freddie are permitted to buy and insure jumbo loans and to control a greater amount of loans overall, and their regulation is increased as well, there is no guarantee that will be good for the home buyer.
“The safeguards are that you proved your income and you've got a good appraisal, but there's no safeguard for the fact that the loan could be worth more than the house,” Burns says.