Friday, July 25, 2008

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on Housing Stimulus Legislation
Remarks as Delivered on the Senate Floor

Mr. President, the Senator from New Hampshire has made a compelling speech with which I associate myself entirely. It is obvious he has traveled to his State, as I have traveled to mine, and listened to constituents who tell me their biggest problem, in particular, is the price of gas. It seems to me the world's most deliberative body should never stop deliberation on what is the crisis of the day. The Senator from New Hampshire made a tremendous speech that was right on point. We may have our differences one way or another on what to do but objecting to letting us debate those differences is not acceptable.

For 25 years, the United States has encouraged consumption and discouraged production. It is time we encourage conservation and empower production, as we bridge our way from gasoline today as an energy source to the next energy source of the 21st century, whether it be the lithium battery, hydrogen engine or whatever.

There is another crisis on our economy I wish to talk about for a second that is equally compelling and that is the housing industry and the tremendous stress our financial markets are under and our financial institutions. There have been a number of speeches made on the housing bill, which we will vote on tomorrow at 11 a.m., which, quite frankly, trouble me because they have not been on target. For a second, I would like to make a few points.

There are a lot of people saying the housing bill we will pass is a bailout for the people who caused the problem. That is not correct. The people who caused the problem are off the radar screen; the investment bankers and Moody's and Standard and Poor's caused the subprime mortgage problem. Wall Street securitized the paper, and Moody's and Standard and Poor's rated it investment grade. It wasn't investment grade and should not have been packaged, but it was. They put out all over America--the originators and lenders--loans that didn't require documentation or a downpayment and that only cost a high yield on the mortgage to make it a nice instrument to sell.

As the housing crises of 1968, 1974, and 1991 were predicated, in part or in whole, on easy credit and shoddy underwriting, so is the stress on our economy today based on that easy credit and shoddy underwriting generated by the subprime market.

The bill we are doing tomorrow is not a bailout to Freddie Mac and Fannie Mae or the institutions that made bad loans. It is an infusion of confidence the financial markets need. Fannie and Freddie suffer by perception from the difficulties of our mortgage market. If anybody would take the time to go look at default rates, for example, they would look at the loans Fannie Mae holds, and they are at 1.2 percent, well under what is considered a normal, good, healthy balance. The subprime market's defaults are in the 4- to 6- to 8-point range. That is causing that problem. That wasn't Fannie Mae paper, and it wasn't securitized by

Fannie Mae. They have $50 billion in capital, when the requirement is to have $15 billion, so they are sound. But the financial markets, because of the collapse of the mortgage market, have gotten worse.

I think Secretary Paulson has done the right thing. I commend Senator Dodd and Senator Shelby for the second key component of the bill. The Dodd-Shelby provision ensures that Fannie Mae and Freddie Mac will have regulatory oversight and be held accountable, as the banking system in our country is. What Paulson has done is said, in return for that, we will give to Freddie and Fannie what the American banking institutions have and that is access to the Treasury window for secured collateralized borrowing.

You might say: What does all this mean? What it means is we will put liquidity back into the mortgage market. There will be good underwriting and accountable credit issued by mortgages that are then sold to Freddie Mac and Fannie Mae to provide the liquidity in the marketplace. This is not a bailout for those two institutions. It is an insurance policy that the credit markets will understand that, A, those institutions are strong and the United States is going to hold them accountable and, B, provide them with liquidity when they need it. That is good for this country and this economy, and it would be a tragedy if tomorrow this Senate doesn't overwhelmingly embrace that legislation.

The second component of the legislation is the reform of FHA, raising the loan limits and providing mechanisms also for troubled loans to be refinanced--not a gift as a bailout but providing a lender whose loan is in trouble because the house depreciated below the outstanding balance on the loan--it is going to be allowed to refinance on a fixed rate--an FHA underwritten loan the individual has to qualify for. If the lender takes the discount down, or takes the hit, that loan can be refinanced and that homeowner, instead of being foreclosed on and having a vacant house, ends up having a chance to pay for that mortgage and the economy is improved.

What is happening today in America is the combination of a large number of foreclosures and no liquidity, as the housing market is off in many areas by as much as 50, 60 percent. Home values are declining at a rate of 15 percent per year this year and 11 percent last year. What has happened to American families' main source of spendable income--their equity line of credit--is that it has vanished. That is why the economy has gone into the tank. We had a housing/fuel boom in the 1990s and early 2000s, and now again we have a housing/fuel recession. The only difference between the boom and recession is, during the boom, we had liquidity, but underwriting got too shoddy. Now underwriting is strong, but the liquidity is not there. The FHA reform and Freddie Mac and Fannie Mae reform will, in fact, do that.

There is a third feature I wish to talk about. It is a feature I introduced, originally, 6 months ago in the Senate. It is a housing tax credit for first-time home buyers to go into the marketplace and buy a house. The United States, in 1974, had a serious recession similar to the one we have today. It was fueled by an oversupply of unsold houses in the marketplace. A Democratic Congress and the Republican President, Gerald Ford, in 1975, passed a $2,000 tax credit for first-time home buyers who went and bought a standing vacant inventory house and occupied it as their home. That incentive brought Americans off the sidelines and into the marketplace, and we absorbed a tremendous amount of the standing inventory. Values came back in the United States and the housing market responded. The $8,000 tax credit--$4,000 a year for the first 2 years--on a home that a first-time home buyer buys and occupies is going to be a huge incentive to the housing market. It doesn't bail anybody out; it incentivizes a market to come back. When that happens, the problems go away. We cannot regulate ourselves, as a nation, into a strong economy. But we can incentivize our people and get confidence to the financial markets and restore what is a very shaky economy.

I come to the Senate floor with the following message: I thank Senator Dodd and Shelby for all their work. I commend the House on what they did to make this housing bill a good bill.

Again, I reassure everybody we are not bailing out anybody. What we are doing is incentivizing Americans to come back into the marketplace, providing them with good, accountable, credible credit, so there is liquidity in the housing market, and seeing to it that two institutions that ensure that Americans can be homeowners--Freddie Mac and Fannie Mae--are strong, and the investment markets have the confidence they need to have the support of the United States and, lastly, under the same type of transparency and accountability that the American banking system has been under since Alexander Hamilton.