What Foreclosure Bill Means for the Election

How this measure changes as it moves through Congress will show which way the wind blows.
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Sens. Chris Dodd (D., Conn.) and Richard Shelby (R., Ala.) from the Senate Banking Committee reached an

agreement

for the basis of a bill on the housing crisis, which will be debated Thursday on the Senate floor.

Amendments are expected to be added to the bill. The debate on amendments and any eventual compromise will offer insight into the future debate between Democratic and Republican presidential candidates in the fall. James Carville called it in 1992 when he said, "It's the economy, stupid."

Taxpayers could face a $20 billion bill to help on foreclosures. The bill allocates about $14 billion to help communities address foreclosure -- $10 billion to communities to help renegotiate subprime loans for first-time buyers and a $4 billion fund to help resuscitate foreclosed properties. Additionally, some tax breaks have been granted to homeowners, purchasers of foreclosed properties and homebuilders -- such as

Lennar

(LEN) - Get Report

,

Toll Brothers

(TOL) - Get Report

or

DR Horton

(DHI) - Get Report

-- for losses on prior profitable year's taxes.

Dodd hoped to add two major pieces. First, he wants a modification to bankruptcy law that would allow a judge to modify the terms of a mortgage in bankruptcy court. Second, he wants new legislation to increase federal funds to guarantee mortgages.

In opening statements, Dodd and Shelby framed the argument for Americans. Dodd sees the crisis in the housing market spreading, as foreclosures and sinking home prices hurt everyone. He wanted help for Main Street, not just Wall Street. Shelby, on the other hand, expressed concern about spending taxpayer money to fix people's bad judgment. He read a letter from a military person overseas who has been saving for a down payment on a home. The writer said he wished Congress wouldn't spend money bailing out those who've lived beyond their means.

Should the government take an active role in helping solve the financial crisis? The Senate Banking committee began grilling

Fed

Chairman Ben Bernanke and Wall Street executives Jamie Dimon of

JPMorgan

(JPM) - Get Report

and Alan Schwartz of

Bear Stearns

(BSC)

on the actions taken to help Wall Street banks.

It will be interesting to watch the debate in Congress. Will Republicans modify their positions and press for a more active government intervention, or will they continue their call not to use tax dollars to bail out subprime homebuyers?

The risk to the economy is real. George Soros appeared on

CNBC

Wednesday and expressed explicit concern for the foreclosure crisis. He noted that the housing market -- and the larger financial credit crisis -- is the worst it's been since the Great Depression. He knows something else about markets. They don't often act rationally in a crisis, and he calls for action on foreclosures to forestall a deepening of distress in the housing crisis.

Soros, of course, supports Democratic presidential candidates Hillary Clinton and Barack Obama. Both candidates have recommended a greater role of the government in resolving the crisis (see

Clinton's

and

Obama's

plans), including plans to address foreclosure and greater regulation of the mortgage industry.

Political risk parallels the economic risk. Clinton and Obama have assailed both Bush and the Republican nominee John McCain for failing to take action. Should the economy continue to worsen and fall into recession, the Democrats will characterize McCain as a modern-day Herbert Hoover.

Clinton and McCain exchanged ads over the issue. Clinton put out another "3 a.m." ad, charging:

"John McCain just said the government shouldn't take any real action in the housing crisis; he'd let the phone keep ringing."

The McCain campaign responded with an Internet ad hammering Clinton and Obama on government spending:

"Hillary Clinton and Barack Obama just said they'd solve the problem by raising your taxes -- more money out of your pockets."

Clearly, the performance of the economy could affect the outcome of the election.

Of course, the economy could also turn around by fall. That would be welcome news to McCain who could campaign on the success of George Bush's stimulus plan based on tax cuts.