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Currently a bill (H.R. 3221, more specifically a section entitled "HOPE for Homeowners Act of 2008) is passing through congress that was written by financial institutions to offload billions of dollars in bad loans to tax payers via a GNMA, a federal guarantee program.  Essentially the program facilitates the transfer of 300,000,000,000 of some of the worst performing loans lenders have taken on to the federal government, and ultimately tax payers.

This bailout was written by the Bank of America themselves and is being carried out verbatim.  When Senator Dodd (D Conn.) announced the bailout on March 13, 2008 he specifically called for "No investor or lender bailout."  But there's no other way to characterize what's about to be written into law.  While lenders will see some losses they are asking tax payers to shield them from billions more in losses.

While this bill is likely passing this week, a veto is likely,  which will then require a revote, it is important to notify your representatives that you do not approve of the passage of this bill.  Please write them today stating that you do not want to see this bailout become law.

Senator Christopher Dodd himself is implicated in a recent corruption scandal involving one of the main beneficiaries of the Hope for Homeowners Act.  Dodd is also, as head of the Senate banking committee one of the top recipients of contributions from banking institutions.

While this bill is likely passing this week, a veto is likely, this bailout must not go through.  This bill will increase housing costs, prolongs a recession, and harms prudent investors, while rewarding irresponsible behavior by not allowing institutions to bear the full consequences of their actions.

Update: From an associated press article.

Rep. John A. Boehner, R-Ohio, the House minority leader, called on Rep. Barney Frank, D-Mass., to hold a hearing investigating allegations that Dodd and Sen. Kent Conrad, D-N.D., got preferential mortgages at the behest of Countrywide Financial Corp. CEO Angelo Mozilo. Countrywide, a leading subprime lender that has been blamed for helping to cause the mortgage meltdown, is among those that could benefit from the housing rescue.

"Democrats who receive sweetheart deals from their campaign contributors shouldn't be pushing legislation forcing taxpayers to bankroll a $300 billion bailout of scam artists and speculators, and the American people have every right to demand answers if they do," Boehner said in a statement.


Banish the Hope for Homeowners Act from HR 3221  It is a bank bailout.  It hurts everyone else.

1. The estimates of 400-500K are wrong in that they are predicated on limited numbers of people opting in to the program.  This legislation provides lenders with an incentive to clear the worst mortgages off their books and move them over to tax payers. Tax payers will bear the brunt of lender irresponsibility.

2. "Sadly in case after case..."  I worked as a mortgage broker in this industry during the time, lenders came in everyday reducing guidelines and pushing loans through every way they could.  They must bear the responsibility for their actions.

3. "The Hope for Homeowners Act is a voluntary program." Senator Dodd states that "no investors or speculators will be allowed to participate."  How can that even be perceived as a valid statement?  The speculators are the banks and mortgage securities investors. They are being bailed out. Lenders will push borrowers into this program in droves, courts will likely support it.  This will not be, in effect, a voluntary program.  It will cost the tax payer far more than the CBO estimate indicates.  Bank of America's (the author of the bill) own numbers show that defaults will run much higher than CBO estimates.  Given the history of failure in these mortgages, and the fact that we will be handed the worst of them, the number is much more likely to reach the $300 billion dollar limit stated in the bill.

4. This is a bailout, Lenders will be rescued from taking significantly greater losses. And there is some protection in a payback from future equity gained. This is a $300 billion bailout for irresponsible lenders.  

5. This does not help home owners.  Homeowners will bear greater losses staying in homes that are over valued, instead of trying to rebuild this economy they'll be struggling to pay off a home with which they are underwater.

6. This hurts affordable housing.  Housing boomed over these last few years to a point where it simply, without incredibly low rates, became impossible for the average worker to be able to afford a home.  Prices must be left to the markets so that they can return to more palatable levels for new home buyers.  As this bill is positioned it convolutes this opportunity.

7. This hurts responsible investors.  Many investors understood the problems these institutions were creating and avoided the same scenarios.  Their prudent positions are punished by this bailout action as they were with the Bear Stearns JP Morgan Chase bailout.

8. This removes market confidence and extends the credit crisis. 

9. This is not about home ownership or lost wealth.  This hurts affordable housing. This bill attempts to keep people in the hole. Housing is severely inflated, even after the declines we've seen.  By exiting bad investments people will be in a better financial position to re-grow our economy.

10. Tax payer money should not be used to prevent institutions like banks, and investors from facing the consequences of their actions.

11. In a foreclosure situation, repossessors are responsible for paying property taxes, this bill needs to include support for jurisdictions to force the lenders to pay these obligations.


Evidence of moral hazard from bank bailouts.


From a Bloomberg Article Today:

http://www.bloomberg.com/apps/news?pid=20601087&sid=akjraOGxIkJU&refer=home


"The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina"


Recent action, like the Fed bailout of Bear Stearns, and currently the "Hope for Homeowners Act" are creating an environment that insulates investors from risky behavior.  By preventing them from facing the consequences of their investments they are more likely to take riskier bets.  This moral hazard threatens to harm the economy and worsen a decline.


Congress must not pass the "Hope for Homeowners Act" (section 257 of H.R. 3221) By backing these loans with GNMA it is  a 300 billion dollar bailout for banks, just like the $29 Billion dollar Bear Stearns/ JPMorgan Chase bailout facilitated by the Fed.

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Caleb Mardini,
Jul 7, 2008, 12:44 PM
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bofa.pdf
(3123k)
Caleb Mardini,
Jul 7, 2008, 12:44 PM
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