The Senate Housing Bill Won't Do Squat

The housing bill emerging from the Senate is something Herbert Hoover would have been proud of. Like Hank Paulson’s much-touted plan for “overhauling” Wall Street by deregulating it, the Senate housing bill “helps” distressed homeowners by giving them lots of little things that won’t really help them at all. Lesson: The Fed (and, indirectly, taxpayers) can bail out investment banks but there’s no stomach for bailing out regular folk who got caught in the downdraft.

Paulson’s proposal, remember, leaves out the most important overhaul of all – forcing investment banks, hedge funds, and other bank-like financial institutions to maintain capital in proportion to the risks they take on. Now the Senate bill leaves out the most important things distressed homeowners need – changing bankruptcy law so borrowers have enough bargaining power to get refinanced, and letting the Federal Housing Administration guarantee the refinanced loans if lenders reduce the amounts the borrowers owe to reflect the reduced home values.

If the market were working, lenders would automatically refinance most of these loans. After all, it’s better for them to have someone in a house paying a mortgage than being stuck with an empty house and nobody paying anything. But as we now know, the loans were repackaged with other loans into securities which were then resold to other investors. So the original lenders no longer have the authority or the incentive to do the refinancing. Hence, there's no market that will automatically do the refinancing. That’s why we need carrots and sticks: A new bankruptcy law that would give distressed homeowners the power to go into bankruptcy to get refinanced if investors don't respond, plus federal guarantees to back up any investor who buys up the securities at a discount and then works with borrowers to refinance the loans.

But as with Paulson’s proposal, the bankers and lenders who are still in relatively good shape went into action. Their lobbyists, working with and through Republicans, watered the Senate Democrats’ housing bill down to almost nothing. If this recession turns much worse, all of them may rue the day they blocked the housing bill. And Democrats will regret how easily they caved.