Taxpayers May Foot the Bill for Government Mortgage Rescue Program

President Bush Backs Legislation That Will Allow Homeowners to Keep Homes

July 3, 2008
By: Scott Janke - Real Estate Mortgages

Many will see the government mortgage program as a much needed rescue for those who otherwise face foreclosure or would be unable to finance the purchase of a home. And indeed it may do just that. However, as with any area of the economy that relies on the government to perform along with the private sector, there are risks.


The risk of course is that the taxpayer will end up footing the bill when borrowers under the program are unable to make payments on the government-sponsored loans. The bill does not provide a direct link for borrowers to the federal government coffers, but does call for the government to provide insurance to lenders. Assistance to the housing industry by the government is not new. In fact the Federal Housing Administration (FHA) has been around since 1934. The FHA became part of the Department of Housing and Urban Development (HUD) in 1965 The FHA does not actually provide funds for mortgages. It insures the mortgages that lenders make to help them against potential losses. The cost of that insurance is passed on to the homeowners in the form of mortgage insurance.

The bill before congress now would extend the government insurance to new refinanced loans for struggling homeowners. The bill would allow the government to insure up to $300 billion for homeowners who would qualify for the loans through cooperation by lenders who would cut the size of outstanding loans to a point where the borrowers would have equity in the property. This may be a cheaper alternative to foreclosure for the lender.

The House passed a version of the bill last month and last week the Senate voted overwhelmingly to advance the bill. Because of procedural delays in ironing out differences between the two houses, the Senate is not expected to pass the bill until after the fourth of July recess.

Already however, there is discussion that the bill will not go far enough to offer any meaningful relief to the housing crisis. When Congress started to fashion a rescue package earlier this year, approximately 2.6 million loans were in trouble. But the problem has grown considerably worse in just six months and continues to worsen. More than three million borrowers are in distress and analysts are forecasting a couple of million more will fall behind in their payments in the coming year as home prices fall further and the economy weakens.

Whatever final form the bill takes, it is heartening to see both side of the isle cooperating on the measure. And while the White House initially threatened to veto the measure it has recently indicated that it is open to supporting the bill if certain provisions are remove. President Bush has said "the Congress needs to come together and pass responsible housing legislature to help more Americans keep their homes."

Perhaps they will.