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A Spending Problem

By Jon Kyl

When there's a problem, throw money at it.

That seems to be the strategy congressional Democrats have adopted to address the economic slowdown, and to stabilize the housing market.

It started when the Democrat-led Congress approved an "economic stimulus" bill. Its centerpiece: issuing one-time "rebate" checks in late May to encourage spending that will, in theory, help the seller invest in more equipment or jobs. I'm skeptical that this spending plan will have any such indirect stimulative effect on our nation's economy.

But now, before the rebate checks have even been written, congressional Democrats tried to pass a "son of stimulus" bill aimed at expanding the role of the federal government in the housing market.

In recognition of the deteriorating housing market, Congress had already approved a bill at the end of last year that encouraged individual homeowners and their lenders to work out alternative payment plans to prevent individuals from losing their homes.

For instance, the bill temporarily eliminates the additional income tax that homeowners would be required to pay if their lender forgives any part of their loan. The provision covers any homeowner with a mortgage before January 1, 2007, and also restructures mortgage agreements entered into after January 1, 2007 and before December 31, 2009. Tax forgiveness is available on mortgage indebtedness of up to $2,000,000.

The federal government has historically helped borrowers through the tax code. It permits homeowners to deduct all of the interest on their home up to $1 million of principle indebtedness, and an additional $100,000 in home equity. In addition, up to $250,000 of capital gains for individuals and $500,000 for married filers is exempt from tax. Together, these two provisions reduce federal revenue collections by $110 billion annually, but, obviously, promote homeownership.

The recent proposal congressional Democrats attempted to advance included what is known as a bankruptcy "cram-down" provision, which would have caused severe damage to the mortgage market had it been enacted, raising interest rates for everyone (regardless of credit status). Currently, mortgage terms are not subject to the jurisdiction of a bankruptcy court. The terms of a mortgage are standardized for a very practical reason. Since conforming loans issued by banks have relatively uniform interest rates and lending guidelines, banks can sell their loans to outside institutions that repackage individual loans into mortgage backed securities (MBS).

The investment market for MBS permits banks to raise funds for homeowners relatively inexpensively, keeping interest rates low for individual, and prospective, homeowners. However, if investors thought that the terms of the mortgages in their MBS could be modified unilaterally by a bankruptcy court, they will be less willing to invest in housing, and those that continued to invest in MBS would likely charge significantly more to cover any risk.

The bill also would have provided another $200 million in counseling funds for families at risk of foreclosure ($180 million was already appropriated in the late fall, and almost all of it remains unspent); and provided $4 billion to the Community Development Block Grant (CDBG) program to purchase and rehabilitate foreclosed properties (the CDGB program has been criticized as having insufficient accountability and for not being focused on lower income areas, and the Inspector General has also found significant waste and fraud in the grants).

Senate Republicans were able this time to defeat this multi-billion dollar spending bill. But, I'm concerned that Senate Democrats will continue their strategy of using the economic slowdown as a reason to spend billions of taxpayer dollars to advance their agenda.

Roll Call, a news publication on Capitol Hill, recently warned, "With a bipartisan compromise on their first economic stimulus package behind them, the second, third and fourth waves of Democratic legislative endeavors likely are to be partisan if this week's debate on the Democrats' second 'stimulus' bill is any guide... The housing bill has little in common with the $156 billion economic stimulus of tax rebates, but that hasn't stopped Democrats from dubbing it their 'second stimulus' bill. It's a branding approach that Democrats said will be a common sight this year."

Sen. Kyl serves on the Senate Finance and Judiciary committees and chairs the Senate Republican Conference. Visit his website at

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