Senator McCaskill sells MO outSubmitted by meekandmild on Fri, 09/26/2008 - 15:28
Thank you for contacting me regarding the housing crisis and the credit crunch. I appreciate hearing from you, and I welcome the chance to respond.
The housing crisis is one of the biggest challenges facing the American economy. Foreclosure rates soared by 50 percent between June 2007 and June 2008. Home prices nationwide have dropped by 15 percent. Meanwhile, losses in the mortgage market have wreaked havoc on credit markets and have had a typhoon effect on Wall Street.
I understand that there is a lot of blame to go around for this state of affairs. Predatory lenders pushed unwitting consumers into loans that they did not understand and could not pay back. Financial firms packaged risky subprime loans into securities which they said were as safe as government bonds, and investors made reckless bets on these new products.
Unfortunately, the individuals and institutions that made bad decisions in the subprime housing market are not the only ones feeling the pain of its collapse. It has had ripple effects throughout the economy. Every foreclosure negatively impacts the value of an estimated 22 neighboring homes, and foreclosures are tearing apart many communities. The loss of housing wealth has hurt consumer confidence and consumer spending, and hundreds of thousands of jobs have been lost, especially in the construction industry. Because banks have lost so much money, even businesses and creditworthy consumers are having difficulty getting loans.
I think that Congress has the responsibility to take measures to stabilize the economy. While it is not perfect, the housing bill that Congress passed and the President signed into law in July 2008 includes several common sense steps to stop the bleeding in the housing and credit markets and prevent future crises. Among other provisions, it expands the Federal Housing Administration’s mortgage refinance assistance program to allow at least 400,000 families facing foreclosure to work with their lenders to stay in their homes. However, in exchange for government help, lenders will have to accept serious losses, and homeowners will have to pay the government back if they sell their homes for a profit. Additionally, a new $7,500 tax credit for first-time homebuyers, which will work like an interest free loan to be paid back over 15 years, should help reduce excess housing inventories.
The housing bill also sought to address the problems with Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, which together hold or guarantee about half of all U.S. mortgages. The companies’ survival was put in jeopardy when investors began to question whether they had enough capital reserves to cover their losses in the mortgage market. The bill attempted to buttress Fannie and Freddie in the short term by allowing the U.S. Treasury temporary authority to extend the companies credit and purchase equity as necessary. At the time, the non-partisan Congressional Budget Office (CBO) estimated that there was a less than 50 percent chance that this authority would need to be used. These guarantees were accompanied by increased oversight. The bill creates a stand-alone regulator with the power to set new capital requirements for Fannie and Freddie, and it will have the power to reject any proposed compensation packaged for company executives.
Unfortunately, by September 2008, Treasury Secretary Hank Paulson felt that he needed to use the authority provided him in the housing bill to intervene directly to prevent the collapse of both GSEs and the damage they would have caused to the global economy. The federal government took control of the management of Fannie and Freddie and will back up to $200 billion in losses if necessary. It will also buy at least $5 billion of mortgage-backed securities issued by the two companies. However, the federal government will be the first group to be paid back if the companies recover and return to profitability.
The bailout of Fannie and Freddie is far from ideal. Allowing the companies to fail would be catastrophic for the U.S. economy. Many experts have speculated that the mortgage market would have shut down altogether. Nonetheless, it bothers me that it happened so soon after Congress received assurances that the authority granted in the housing bill would not be used. It infuriates me that the executives who steered the companies towards a cliff stand to receive huge severance packages. They need to be held accountable, and I am confident that, if the Treasury does not act, Congress will.
As for the broader economy, the passage of the housing bill is a serious achievement, but the work is far from done. We need to invest in our workers through education and job training, and we need to invest in renewable energy to create good jobs and work toward energy security, just to name a few. As your Senator, I will be working hard to strengthen our economy and improve life for all Americans.
Thank you again for contacting me. I hope you will continue to reach out in the future with your thoughts and advice.
Senator Claire McCaskill