Senate Considers Housing Bill

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The Senate holds a special session on Saturday to push through legislation to provide lenders and buyers financial help. It would also offer investors renewed confidence in the mortgage giants Fannie Mae and Freddie Mac.

SCOTT SIMON, host:

This is Weekend Edition from NPR News. I'm Scott Simon. The U.S. Senate has just passed the housing rescue bill by an overwhelming 72-to-13 margin. The legislation passed the House on Wednesday. It goes to the president, who says he will sign it. It provides government support to prop up Fannie Mae and Freddie Mac, the giant mortgage enterprises, and provides $300 billion in loan guarantees to help homeowners who are in danger of losing their homes. NPR's John Ydstie joins us. John, thanks for being with us.

JOHN YDSTIE: Pleasure to be here, Scott.

SIMON: We got more bad news on the mortgage front on Friday. The company RealtyTrac says that foreclosure filings have doubled from the same time last year. Seven hundred and forty thousand homes are currently at some stage of foreclosure. Now, how would this bill help?

YDSTIE: First of all, it's a voluntary program. But for lenders who agree to participate, the bill requires them to refinance the troubled mortgage at just 90 percent of the current value of the house. Now, that's likely to represent a big loss since housing prices have fallen 10 percent or more in most areas.

SIMON: So what's the incentive for the lender to take such a loss?

YDSTIE: Well, there are a couple of things. First, going through foreclosure would likely mean even bigger losses. And second - and I think this is the most important - the new loan would be backed by a government guarantee. The problem is that there are a number of obstacles, and a couple of them have to do with the complex way that mortgages are packaged and sold as investment these days.

SIMON: Right, because you just can't walk in to the bank where you got the loan originally, because these things are frequently bundled, and companies merge and sell them back and forth.

YDSTIE: Exactly. Your mortgage is now very likely embedded in a mortgage-backed security. There could be dozens of investors who own it - hedge funds, pension funds, investors all over the world. And you're not going to get them to show up and work this out with you at some office down the street.

SIMON: Yeah.

YDSTIE: The people who will have to refinance are the servicers of the mortgage, the people who send out your bill, collect your payment, and send it to investors.

SIMON: This strikes me like you're trying to get a large family to agree on who's going to take the....

(Soundbite of laughter)

YDSTIE: Who's going to take the hit. Whether they ought to take a hit or not.

SIMON: Yeah.

YDSTIE: That's exactly right. And there's been a lot of concern about that, that actually the servicer might get sued by one of the investors. There is a provision in this housing mortgage bill that does give servicers some protection from that. But there are other issues that could get in the way of this working, and here is one.

These servicers are actually set up to be debt collectors. And to make this plan work, these servicers are really going to have to gear up to be mortgage brokers, which means having the staff to sit down with individual homeowners, run credit checks, get home appraisals, and set up a new loan. And it's a totally different line of business. And it will take some time and effort to set up.

SIMON: And it will cost money, right?

YDSTIE: Exactly. And there is no provision for that. That's a problem. But that's not the biggest problem, actually. According to the people who I've talked to who are familiar with the culture of these financial institutions, the big problem is that they view taking a loss as the absolute last option. They're just viscerally opposed to them. In fact they call losses "haircuts."

(Soundbite of laughter)

YDSTIE: So I guess they're like the little kids in the barber chair, they just want to scream when they get a haircut. But I'll tell you, given the depth of the housing collapse right now, they're probably going to agree to go the barbershop.

(Soundbite of laughter)

SIMON: NPR's John Ydstie.

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