Vol. 72/No. 31      August 4, 2008

In a rare weekend session the Senate approved the American Housing Rescue and Foreclosure Prevention Act by a large bipartisan margin, 72 to 13. Earlier in the week the House approved the bill 272 to 152.

The act allows the Treasury Department to extend an unlimited line of credit to the mortgage companies Fannie Mae and Freddie Mac, which are private but government-sponsored, and buy their stock.

A rapid sell-off of the mortgage companies’ shares began July 10 after a former central banker commented that the companies might not be solvent. Since June Fannie Mae and Freddie Mac have lost $11 billion due to loan foreclosures and borrowers who are behind in their payments.

USA Today reported that Lehman Brothers analyst Bruce Harting wrote in a note to clients that any threat of a failure of the mortgage companies “could trigger a meltdown in credit markets that would make the movements in credit markets that we’ve seen over the last year look like a modest hiccup.”

Fannie Mae and Freddie Mac hold or back more than $5 trillion of mortgage debts in the United States. Central banks around the world hold billions in the mortgage companies’ debt securities. “Needless to say, the impact of a dislocation of that order could cause serious harm to the global economy,” Harting wrote.

The housing law provides $300 billion to the Federal Housing Administration to help banks and other lending institutions refinance an estimated 400,000 home loans at lower rates insured by the FHA.

This is a fraction of the loans that are in trouble. Nationwide, 739,714 homes received foreclosure-related notices in the second quarter, more than twice as many as in the same quarter last year. One of the bill’s main sponsors, Senator Christopher Dodd, cited statistics that 8,500 homes a day are foreclosed.

Last December the White House and major lending institutions announced a “Hope Now Alliance” to help homeowners trapped by high-interest subprime mortgages. In May the alliance refinanced 70,000 mortgages. RealtyTrac, a company that keeps data on mortgage defaults, said that during the same month there were 261,000 foreclosure notices filed. Moodys Economy.com’s chief economist, Mark Zandi, estimates that 5.5 million loans will default by the end of 2009 and half will go into foreclosure.  
 
 
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