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Guest Commentary: Bail out bill does little to help homeowners

Congress recently approved legislation that would bail out housing speculators and lenders at an enormous cost to taxpayers, while doing little - if anything - to help struggling homeowners stay in their homes.

The bill will place an immense financial burden on every American taxpayer, including those who are struggling to make their mortgage payments, and waste billions of dollars in misguided efforts to help lenders deemed "too big to fail."

One of the centerpieces of this legislation is a proposal to help Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that hold more than $5 trillion in liabilities composed of mortgage-backed securities.

Because of risky lending practices, poorly managed portfolios, and the housing market downturn, Fannie and Freddie have incurred losses of more than $5 billion in the past year - the first loss for these two GSEs in 25 years - and seen their stocks sink more than 80 percent in value over the past year.

Fannie and Freddie enjoy an implicit guarantee of their debts by the federal government, so both the Treasury Department and the Federal Reserve recently proposed various administrative and statutory actions to stabilize them.

One of those actions included in the bill Congress approved would temporarily remove the $2.25 billion cap on Fannie and Freddie's lines of credit at the Treasury Department. That means Fannie and Freddie could borrow an unlimited amount of taxpayer money if necessary.

The proposed bail-out of Fannie and Freddie could cost American taxpayers $25 billion over fiscal years 2009 and 2010, according to the Congressional Budget Office (CBO).

If Fannie and Freddie's finances deteriorate further, taxpayers could be on the hook for $100 billion or more. This recognition requires the U.S. debt limit to be raised to $10.6 trillion.

I could not support this gamble with taxpayers' money when it is unknown how much this proposal will ultimately cost.

The legislation would also encourage lenders to shift their riskiest mortgages to the Federal Housing Administration (FHA). Specifically, the bill creates the "HOPE for Homeowners Program," which would allow subprime mortgage holders to refinance their mortgages into FHA-backed loans if the lender agrees to write down the value of the mortgage.

Under this program, lenders could cherry pick up to $300 billion of their worst loans and refinance them into FHA-guaranteed loans. The CBO estimates that a third of the mortgages refinanced under the HOPE for Homeowners Program will enter into foreclosure, and subsequently, taxpayers could again be on the hook for billions of dollars.

This legislation also allows the FHA to insure even more expensive, high-risk mortgages and allows local governments to distribute billions in pork to politically favored housing groups and the very lenders who offered mortgages their customers could not qualify for or afford.

Congress should not pass a bill just to show it is simply "doing something" to help homeowners who cannot make their mortgage payments, or write a blank check to Fannie and Freddie.

I ultimately opposed this legislation because I do not think the numerous liabilities that could be passed to American taxpayers outweighed the benefits of the bill. More importantly, I do not believe that the federal government should bail out irresponsible mortgage lenders under the guise of an effort to help struggling homeowners.

U.S. Senator Jon Kyl is the Assistant Republican Leader and serves on the Senate Finance and Judiciary committees. Visit his website at www.kyl.senate.gov.

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