Bailing out homeowners called a bad move, especially in Vegas

By Lisa Mascaro

Thursday, Sept. 20, 2007 | 7:02 a.m.

WASHINGTON - As the White House and Congress race to ease the foreclosure crisis by propping up delinquent borrowers with government aid, some skeptics warn that Washington could do more harm than good, especially in the investor-heavy Las Vegas housing market.

The House passed legislation on Tuesday to help homeowners get out from under the adjustable-rate mortgages that have left many households unable to meet their monthly payments.

The Senate banking committee passed similar legislation on Wednesday.

The congressional action comes as President Bush in late August announced a temporary effort now under way to help homeowners refinance their mortgages with federally backed loans on better terms.

Washington's rescue attempt comes as figures this week show Nevada is among those states leading the nation in foreclosures, according to the Associated Press. Nevada, California and Florida had the highest foreclosure rates in the country last month.

The state's lawmakers in Washington mostly back the efforts, and in Nevada the governor is to speak about the mortgage crisis at an event today in Las Vegas. Assembly Speaker Barbara Buckley, D-Las Vegas, convened a special subcommittee to look into the crisis this week.

But taxpayer advocates warn that Washington is exposing itself to risk by expanding federally backed mortgages that will be the government's responsibility in the event of further default.

Also, although the new loan programs are supposed to help owners who live in their homes, "flippers" and other investors who tried to scoop up properties during the boom could try to cash in , said Jacob Vigdor, an associate professor of public policy and economics at Duke University.

"Everybody wants to look like they're helping the small-time borrowers who are going to lose their houses," said Vigdor, who recently wrote a paper skeptical of government bailout efforts for the National Taxpayers Union, a limited-government group in Washington. "The potential for abuse is always there."

In Nevada, one-third of the properties now in trouble are owned by investors, according to the Mortgage Bankers Association.

Housing Secretary Alfonso Jackson insisted this week that the government would not be bailing out those who took unreasonable risks.

"So-called yuppie buyers who paid $900,000 for a condo and bought two cars and got in way over their heads won't be part of our effort to help middle-income homeowners," Jackson told the Chicago Tribune editorial board.

The Washington efforts target homeowners who took out interest-only or adjustable-rate mortgages, which start at low teaser payments that later become larger. Estimates are that 2 million of those mortgages are adjusting, and homeowners are scrambling to make the higher payments.

Central to the bailouts being engineered by Congress and the White House are changes to the Federal Housing Authority, which provides mortgage insurance for lenders.

The Federal Housing Authority would be able to provide mortgage insurance for so-called jumbo loans of as much as $417,000. Currently, the FHA can insure loans up to $362,000, which has limited the agency's ability to back loans in the go-go housing boom. In Nevada, the median home price is about $317,000.

The potential benefit for borrowers is two-fold: existing borrowers could refinance their loans with FHA insurance, and first-time buyers could secure new loans that had been out of reach.

For mortgage companies facing clients in foreclosure, refinancing with the FHA gives lenders the guarantee that comes from having mortgage insurance backed by the federal government.

The House bill sets the limit even higher, at $720,000, for some high-priced housing markets in California and elsewhere, a provision that has led Bush to threaten a veto of the package.

Homeowners must occupy the property and meet income requirements to qualify. The Bush administration says 80,000 homeowners could benefit from the programs, and Congress' efforts would further expand the reach .

Home builders have lobbied for the changes to help stabilize the market.

"The changes will really open the program up to these kinds of people so they won't have to go to the more crazy terms," said David Ledford, vice president for housing finance and policy at the National Association of Home Builders.

Ledford said the risk for the government is small because the pool of potential applicants is limited.

Nevada's lawmakers praised the congressional action this week. Democratic Rep. Shelley Berkley and Republican Reps. Jon Porter and Dean Heller voted for the House bill.

"Nevada homeowners who were duped into predatory loans and have fallen behind need the kind of alternatives afforded by this legislation," Senate Majority Leader Harry Reid said in a statement after the Senate bill passed out of committee.

But Vigdor says lenders, not homeowners, are the true beneficiaries. They can hand off their troublesome mortgages to the government insurance company and not suffer any of the risk they incurred from making dicey loans at the outset.

He cautions that extending help could artificially prop up the housing market , which is now adjusting after the years of boom.

Even though FHA operates as most insurance programs do, with premiums covering any bailouts, in the end, the government would be left holding the bag, he said.

"When people lose bets they should feel the consequences of that," he said. "If the government gets this reputation for going out and helping people in trouble, you're going to find a lot more people getting into trouble."