I applaud Sheila Bair, chairman of the Federal Deposit Insurance Corp., for telling The Wall Street Journal that the government's bailout efforts aren't doing enough to help homeowners.

She's right.

I was thinking about the reasoning behind not helping homeowners, which seems to be the moral hazard argument. That if we help the bad borrowers, who knew they couldn't afford their homes, that we are making it penalty-free to engage in bad, risky, damaging behavior. Borrow money for whatever, and you won't even need a get out of jail free card.

There's another way to think of it. We are bailing out banks but not homeowners. So they get the Get of Jail Free cards? We don't seem to be worried about moral hazard among financial institutions for what reason exactly? Are we assuming they don't behave badly?

Here's my response on the homeowner front:

Not long ago, many thousands of honest workers in the mortgage industry had the expertise it takes to pick a good borrower from a bad one. They spent their days evaluating and verifying loan applications, making judgments on whether to approve them.

That stopped at some point. A few years ago, when I went to refinance my mortgage, the approval came from software on a bank officer's screen. No one had to be spoken to. Paperwork wasn't checked.

Compare that to the first time I went to get a mortgage.

That was a huge ordeal, because our income was not verifiable. My husband was an attorney. When he won a case, he had money. When he did not, we did not. We had up and down income.

I wrote a huge explanation statement for our mortgage broker. I had to explain, too, all the flaws on our credit report that came from being young, with kids, and in debt. We got a loan, but at a high rate of interest.

None of that was required later. Just poof on the screen, your credit score is good enough.

I'm glad it was. But I was prepared, with a briefcase full of papers, to make my case. No one asked.

The expertise to separate out borrowers, I'm going to guess, has not evaporated.

This body of knowledge seems to have just been shoved aside. In its place are some stupid lending models that relied on the pseudo-science of a number, a credit score, as the great predictor.

I know they're stupid. Look how they turned out.

> Discuss this entry

Want to know what's in the Bailout Bill?

All 451 pages of it are finally available.

Have a look here.

> Discuss this entry

You want your portion of the Bailout Bill? You got it.

This thing's getting so many extras it's like a loaded baked potato -- sour cream, chives, bacon, you name it. Coming right up.

For Floridians and residents of a handful of other states that don't have state income taxes, there is the extension for the state sales tax deduction. Residents of other states which have state income taxes get to write off their state tax bills. But we don't. A few years ago, Congress made it possible for taxpayers to choose - write off state sales taxes or income taxes. That gave Floridians an extra deduction.

Congress put a time limit on it, however. And the sales tax deduction has already been extended once. So this bill extends it a bit more. Through 2009, from what I hear.

That's nice. But it's also not new. Last week, the Senate approved the same thing.

The Bailout Bill is getting this and so much more. I spotted another tax break for Puerto Rican and Virgin Island rum producers. That's a help, I'm sure, but must we do this now, to get a bailout?

I worry about what all will end up in there.

> Discuss this entry

Tax Break Extension

To the many South Floridians who are desperately trying to sell a home that’s worth less than the mortgage balance, the tax break was the best part of the bailout bill.

If the bill had passsed, homeowners would not we federal income tax on certain mortgage debt that their lender forgives before Jan. 1, 2013. For example, lenders can agree to a “short sale” for an amount that is less than the mortgage. The unpaid debt is forgiven.

Under federal tax law, any forgiven debt is subject to federal income tax. But Congress changed that last year, making an exception to the rule for mortgage debt up to $2 million on a principal residence. The exception covered mortgage debts forgiven in 2007, 2008 and 2009.

The bailout bill would have extended that time period by three years.

The tax break also applies to foreclosures, deed-in-lieu of foreclosures or any loan modification.

So, sorry, no extension applies.

Investors who got caught in this crisis don't get the break either.

And as one commentor on my earlier post noted, the lenders are playing hardball. They don't want to give up on this debt, they're going after your credit and doing anything they can to get repaid. No nice guy tactics in this market.

> Discuss this entry

To the many South Floridians who are desperately trying to sell a home that’s worth less than the mortgage balance, there’s one bit of good news in the bailout bill.

You won’t owe taxes on any debt that’s forgiven in a short sale, which is a sale for a price that’s less than the mortgage, through Jan. 1, 2013.

That’s a three-year extension of a tax break that Congress put in place last year.

I’m culling through the bill now, looking for anything else it offers homeowners or borrowers. Check back later for more….

> Discuss this entry

Homeowners, you're not getting a bailout.

Banks are the target of this debate.

Not foreclosures, distressed borrowers, would-be homeowners or the under-water mortgage industry.

Treasury Secretary Henry Paulson isn't aiming for the housing market. He's working to restore credit. Which, eventually, will help the housing market.

But the bailout plan is not specifically designed to buy mortgages. It could end up buying home loans, but that's not the target. Treasury Secretary Paulson is aiming for mortgage-backed securities. These are bundles of mortgages of any kind, not necessarily home mortgages. It's possible that securities backed by commercial loans get bought first.

Paulson has made no promise to snap up home mortgages.

And to be sure, when this bailout plan buys a mortgage-backed security, the terms of the underlying mortgage would not be changed.

There is fierce resistance on Capitol Hill to the idea of anyone telling the banks that they have to start working with borrowers and altering the terms of distressed loans.

The housing bill that passed this summer is an example. Its provisions for renegotiating loans, they're all voluntary. If lenders want to, they can cut down a mortgage amount or change the interest rate. They don't need a new law to do so.

But they don't want to. Just as banks don't want to write down the value of these mortgage-backed securities. Or to sell them at current prices.

They don't want to take the loss, to cut down their own capital. Because that would weaken them.

Several organizations -- AARP, Center for Responsible Lending, the Leadership Conference on Civil Rights, Acorn -- are calling on the House and Senate to insert relief for homeowners into the bailout. They want to allow judges in bankruptcy cases to alter the terms of a loan.
But so far, that's not part of the plan that's being debated in Congress.

Paulson was asked about the impact of this plan on the foreclosure problem during his testimony in the Senate. "I would say regrettably not every homeowner is going to save their home, as you well know," he replied.

And then he went on to say what was more important was making financing available so that lenders could keep on lending.

> Discuss this entry