New Mortgage Market Bailouts at ‘Zero’ Cost to Taxpayers

Today, the Obama administration announced two new programs to help a small segment of the U.S. housing industry get back on its feet, all with the promise that the taxpayer will not have to foot the bill.

HFAs Getting Help:
State and local housing finance agencies, also known as HFAs. They originate home loans for first-time homebuyers and lower-income buyers. They also provide refinance loans for rental properties. According to National Council of State Housing Agencies President Susan Dewey, the HFAs create between 100,000 and 200,000 new mortgages every year (this represents about 1 percent of the total mortgage market). They are also known for making very safe long-term loans with very low default rates. “Performance of HFA loans has materially outperformed most other loan types, especially when controlling for borrower profile,” according to a Treasury Department fact sheet. They create tax-exempt bonds based on their mortgage securities to pay for their operations.

Why HFAs Need Help:
Dewey says the HFAs have only issued $4 billion in bonds this year. In 2008 they issued $10 billion and in 2007 the total was $16 billion.

“With the market upheaval, we’ve been unable to sell new mortgage bonds for a year,” Bob Kucab, the executive director of the North Carolina Housing Finance Agency, said in a statement accompanying the release. “Despite all the ingenuity we can muster, we’re now helping only about a quarter as many first-time buyers as normal.”

The Obama/Treasury Plan:
1. The Treasury Department will buy HFA-backed securities issued by government controlled finance giants Freddie Mac and Fannie Mae.
2. Freddie and Fannie will provide the HFAs with a credit program to refinance the debt from their existing bonds at better rates and terms.

The hope is that these measures will provide the HFAs will the money needed to fund more new mortgages.

The Cost:
The HFAs will pay fees to participate in the new programs, which will supposedly cover the costs, but some reports have said that the initiative could cost taxpayers as much as $35 billion.

Treasury Assistant Secretary for Financial Institutions Michael Barr said there are some risks involved, but he didn’t expect taxpayers to take any losses for these programs.

“The expected cost to the government is zero,” Barr said of both programs. It seems unlikely, but perhaps…

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