In late July 2008, Congress passed and the President signed the Housing and Economic Recovery Act of 2008 that included the following provisions: Federal Housing Finance Regulatory Reform Act of 2008, HOPE for Homeowners Act of 2008, and the Foreclosure Prevention Act of 2008. These programs did not accomplish what they set out to do.



Success can mean different things to different parties. For homeowners, success means keeping their house, getting a lower payment, and profiting from its eventual sale. For lenders and holders of mortgages, success means keeping a steady flow of money coming in from previously insolvent debtors. For the government, success means doing something to make angry homeowners less likely to vote them out of office and keep our financial system from complete collapse. As with many pieces of legislation, it is an ugly series of compromises, and ultimately, none of the concerned parties may deem it successful.

In the Savings and Loan disaster of the late 1980s, the government was liable to investors for their losses through the Federal Savings and Loan Insurance Corporation (FSLIC). The government had no choice but to compel taxpayers to cover the costs of the industry bailout. The Great Housing Bubble had no such direct government liability until this burden was assumed by the government retroactively. The Federal Housing Finance Regulatory Reform Act of 2008 established a regulator to watch over the GSEs. This was too late to do anything about the serious problems facing the GSEs, and it acted as an interim step toward a direct GSE bailout of lenders and investors at the expense of the taxpayers. If one of the GSEs would have failed prior to this legislation, many in Congress would have resisted a taxpayer bailout because the activities of the GSEs were not strictly regulated. Once the regulatory framework was in place, Congress had greater political cover to justify a taxpayer bailout.

In early September 2008, not long after the legislation was passed, the Department of Treasury took over "conservatorship" of the GSEs. It is unclear what will happen once under government control, other than the taxpayers of the United States will be directly responsible for all losses. In time, the government's interests in the GSEs will likely be sold, and the GSEs will become private companies again, but this time with greater governmental oversight. With any regulatory framework, enforcement is pivotal to its success. If another bubble starts inflating, enforcement may not take priority over profits, particularly when the GSE lobbyists start donating heavily to key Congressional leaders.

The HOPE for Homeowners Act of 2008 and the Foreclosure Prevention Act of 2008 are of primary interest to homeowners. It falls well short of what most homeowners wanted: direct debt relief from the government. However, it does provide incentives for lenders and investors to forgive the debts of homeowners, but it makes homeowners agree to take out an FHA loan with a higher interest rate and give half the profits on the eventual sale to the FHA. Neither of those provisions will be palatable to borrowers. Both the lender and the homeowner must voluntarily participate. If the lender is determined to foreclose or if the borrower is determined to give up paying back the loan, neither party is compelled to work with the other. For lenders facing taking a property back in foreclosure, writing off a significant portion of the original loan may be preferable to taking a larger loss in a foreclosure. Desperate owners facing foreclosure may like the idea of debt forgiveness, but their payments will not go down much, and giving up half their appreciation will not go over well when they go to sell the property.