The Senate logjam on housing has been broken!
Pending legislation in Congress, aimed at assisting homeowners faced with foreclosure, will now clear the Senate Banking Committee. This paves the way for important relief, and will help create a bottom in home prices.
Why This Is Important
The pending legislation is an important incremental step in the government response to the housing problem. Most investors do not understand or accept the incremental nature of government action. Astute observers realized that bold strokes were necessary.
Doug Kass wrote about the need for a "Marshall Plan" for housing in a recent Columnist Conversation post. In
an earlier article
on RealMoney, I pointed out the challenges of political leadership. I wrote that a strong President might have used the State of the Union Address to highlight a comprehensive plan, and lamented that this would not happen.
Instead we have seen the typical government patchwork:
- Legislation to make sure that forgiveness to homeowners was not taxable.Assistance to homeowners through the FHA.
- Increasing the conforming loan limit so that "jumbo" loans could be handled by Fannieundefined and Freddieundefined.
- Relaxing the capital restrictions on Fannie and Freddie.Increasing the powers of the Federal Home Loan Bank and authorizing additional lending.
- The Fed -- lowering rates, and initiating programs to accept more varied collateral from banks and investment banks.
- And now, if the current proposal is passed, some direct relief for those threatened with foreclosure.
At some point, the incremental government steps accumulate into something resembling a comprehensive plan.
Strong Voices Agree
Doug Kass, who has been prescient on the nature and extent of housing problems, has identified the current legislation as important -- both on this site and on his frequent contributions on Kudlow & Company.
Jim Cramer has taken a different approach, but one that is equally helpful. He comments on the micro-economics of the housing situation. If the sense of a major overhang in foreclosures is reduced, it may encourage buyers who are concerned about instant losses from their purchases.
Nouriel Roubini has been a vocal bear on housing and the market impact.
strong support for the legislation. He believes the potential cost of the legislation, scored by independent Congressional analysts as something in the $2 billion range, is small when compared to the economic effects and potential future bailouts.
"The story is simple: many homeowners are underwater (have negative equity in their homes) and/or are unable to service their mortgage payments. Given that mortgages are mostly non-recourse loans millions of such homeowners will walk away from their homes and/or end up into an avoidable foreclosure. Freezing reset of interest rate on mortgages is not enough; when economic agents are unable to pay (insolvent) debt relief is both unavoidable and necessary. A disorderly workout of unsustainable debts make everyone - borrowers, lenders and the government - worse off." "Unfortunately for the critics of this proposal the experts who are supporting it are very broad and ranging from Democrats to Republicans, from folks to the left of the center and others to the right of the center or outright conservative."
Roubini goes on to cite the broad economic support for this approach.
The Future Path
The compromise negotiated by Senators Dodd and Shelby should provide a model for Senate passage. Then there will be two more steps.
First, a conference committee will resolve differences between the Senate bill and Rep. Barney Frank's House version. The result should be passed by both Houses of Congress.
Second, the bill requires the signature of President Bush. And he has to sign it. Why?
First, Republicans want to be seen as responding to this crisis. Those from the most severely affected states are supporters. A veto would undermine the McCain campaign.
Second, Senator Shelby was doing Bush's work, as he exacted compromises from the Democrats. The Senate version is more conservative than Barney Frank's version. There are various provisions that bow to concerns about bailing out cheaters and risking taxpayer money.
Personal Opinions vs. Investing
I realize that readers will have various opinions about this legislation. Some may view it as too modest. Others will see it as unduly risking taxpayer funds. This is the nature of our government. Policy results in a compromise with the representation of many interests. No one fully endorses the result.
I urge investors to distinguish between their personal views on the legislation and the expected market impact. The market will have a friendly reaction to this legislation, whether we personally like it or not.
The market reaction may not happen immediately, since not everyone will see this compromise as a crucial step. This is where I try to add some value, as the public policy guy on the site. Perhaps I will be wrong about a Bush veto or ultimate passage.
Meanwhile, I am giving you my best forecast based upon my knowledge and experience.
At the time of publication, Miller had no positions in stocks mentioned, although positions may change at any time. Jeffrey Miller is president and CEO of NewArc Investments, a registered investment adviser, and Capital Markets Research.
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