Regardless of whom voters decide to put in the White House for the next four years, Congress is expected to return after the election for a "lame duck" session that may produce a massive stimulus bill to cushion the blow of the economic downturn.

Trade groups and businesses representing the housing and real estate industries are hoping lawmakers will strengthen tax credits for home buyers, raise Fannie Mae and Freddie Mac’s loan limits, and make sure some of the $700 billion earmarked for buying troubled assets from banks is used to help prevent foreclosures.

Regardless of whom voters decide to put in the White House for the next four years, Congress is expected to return after the election for a "lame duck" session that may produce a massive stimulus bill to cushion the blow of the economic downturn.

Trade groups and businesses representing the housing and real estate industries are hoping lawmakers will strengthen tax credits for home buyers, raise Fannie Mae and Freddie Mac’s loan limits, and make sure some of the $700 billion earmarked for buying troubled assets from banks is used to help prevent foreclosures.

But while previous efforts by lawmakers and the Bush administration have been geared at propping up the financial system, unfreezing credit markets and stimulating consumer spending, there’s now talk of a more concerted effort to jump-start the economy by boosting government spending.

Some of the proposals — like extending unemployment benefits and ramping up spending on job training and infrastructure projects like bridges and roads — are reminiscent of programs put in place during the Great Depression. In addition to being politically controversial, they will be expensive — estimates of the cost of a new stimulus package range from $100 billion to $400 billion or more.

Many economists say an increase in government spending is needed to keep the nation — and the world — from the grips of a protracted recession. But should Congress decide to proceed with a massive expansion of federal spending, it may have to be selective in providing further relief to housing markets as the nation’s debt burden grows. Lawmakers may see some of the demands being made by builders, Realtors and bankers as too costly.

Industry’s wish list

The economic stimulus package passed by Congress in February gave first-time home buyers a $7,500 tax credit, but required that they repay it. The National Association of Realtors wants any new stimulus bill to remove the requirement to repay the credit, and allow not just first-time home buyers but anyone purchasing a primary residence to claim it. Some home builders are calling for the tax credit to be doubled or more, with no repayment provision.

Lisa Marquis Jackson, a vice president with John Burns Real Estate Consulting, sees a less than 50 percent chance that Congress will revisit the issue of home buyer tax credits.

A true buyer tax credit — one that doesn’t have to be repaid — might be an effective stimulus, she says. But given the limited success of the initial home buyer credit, it will be harder to convince Congress to take an estimated $75 billion tax revenue hit that a more generous credit would cost, Jackson said in a recent bulletin to clients, "Bad Moon Rising? What Can We Expect From Congress?"

"I think it’s unfortunate, but I think we had our opportunity, and now there are other industries asking for that money," Jackson told Inman News. "I don’t know if they’ll come back and let us dip our chip in the guacamole two times."

NAR also wants Congress to make permanent increases in the loan limits for the Federal Housing Administration, Fannie Mae and Freddie Mac. The limits, boosted in February to $729,750 in high-cost areas by the Economic Stabilization Act, are set to return to $625,000 on Jan. 1.

There have also been calls for the government — which placed Fannie and Freddie in conservatorship in September — to force the loan financiers to lower their fees and loosen underwriting standards in order to stimulate borrowing. But those actions could put taxpayers — who are already committed to providing up to $200 billion in backing for Fannie and Freddie — at greater risk.

Another way to provide support for housing markets would be to provide more resources for foreclosure prevention.

NAR wants the government to use a portion of the $700 billion Congress authorized the Treasury Department to borrow in order to buy troubled assets from banks to stabilize home prices.

NAR says the Treasury could do so by pressuring banks to loan more money to consumers and small businesses, while expediting short sales and moving real estate-owned properties off their books.

Another proposal for putting the $700 billion earmarked for the troubled asset repurchase program (TARP) to work is to allow the government to guarantee future payments on loans when lenders agree to modify their terms to help borrowers avoid foreclosure.

Federal Deposit Insurance Corp. Chairwoman Sheila Bair says the Emergency Economic Stabilization Act, which created the $700 billion TARP program on Oct. 3, already gives the Treasury the authority to offer loan guarantees as an incentive to facilitate loan modifications.

The Treasury Department and the FDIC are reportedly negotiating the scope of a plan that could allow the government to guarantee up to 3 million loan modifications at a potential cost to taxpayers of $50 billion (see story).

Looking for results

One reason lawmakers may be reluctant to sign off on further incentives to stimulate borrowing and spending is the limited success such measures have had to date.

Powerful Democrats like Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., have complained loudly that banks that benefit from the TARP program’s "recapitalization" of banks through purchases of preferred stock may use the money to acquire competitors instead of stepping up lending. The Federal Reserve’s latest quarterly survey of bank lending shows most tightened standards on mortgages and other loans.

Frank — who has warned that Congress could withhold the second half of the $700 billion TARP authorization — has scheduled oversight hearings Nov. 12 and Nov. 18 before the House Financial Services Committee.

"It is very important if congressional and public support for this program is to continue that we receive assurances at those hearings that the money being advanced will be used only for lending and for no other purpose," Frank said in announcing the hearings.

Jackson agreed that while TARP "didn’t really do what everybody hoped," some banks are in a Catch-22 situation.

In cases where banks are using the money to shore up their balance sheets — as opposed to paying out executive bonuses or planning acquisitions, as Frank has protested — they can’t be faulted. The pendulum of underwriting standards has swung back from the excesses of the housing boom and closer to historical norms, where many believe it should stay.

"You can give the money to the banks, but you cant make them lend it to people," Jackson said.

Lawmakers found they had the same problem when they approved tax rebates of $1,200 or more per family in February’s economic stimulus package.

Keynesian spending

Now, they are being told by some economists if households and businesses can’t be prodded into spending more through tax incentives and rebates, it’s time for the government to ramp up spending.

The first stimulus bill failed "miserably," New York University economist Nouriel Roubini told Senate lawmakers at an Oct. 30 hearing of the Joint Economic Committee, because households and businesses are saving rather than spending.

Roubini recommended $300 billion to $400 billion in government spending on infrastructure, green technologies, unemployment benefits, tax rebates for lower-income households, and block grants to state and local governments to boost spending on roads, sewers and other infrastructure.

"If the private sector does not spend or cannot spend, old-fashioned traditional Keynesian spending by the government is necessary," Roubini said.

Testifying at the same hearing on behalf of businesses in the Baltimore area, Donald Fry said each $1 billion spent on transportation investment supports approximately 35,000 jobs and $1.3 billion in payroll.

Fry, the president and chief executive officer of the Greater Baltimore Committee, said more than 600,000 jobs were lost in the construction sector from 2007-08, and that the economic downturn will make it hard to secure funding for an estimated $1.6 trillion in needed repairs to roads, electrical power grids, and water and wastewater systems nationwide.

Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, warned the Joint Economic Committee that the U.S. economy is going through "a massive de-leveraging process" that will reduce the purchasing power of consumers "for years to come."

Johnson said attempts to prop up the value of real estate and other assets by "putting more money in people’s pockets" is likely to fail.

The experience of the stimulus package earlier this year was that a large proportion of the tax rebates went toward household savings or paying down debt," Johnson said. "Asking the American consumer to spend his or her way out of this recession is unlikely to succeed."

In the short term, Johnson favors direct aid to state and local governments to help them close budget shortfalls and extending unemployment benefits and food stamp aid.

But Johnson also called the FDIC proposal for government guarantees of loan modifications "promising."

Although the government might lose money, he said, "This would be an appropriate usage of money as part of the stimulus package, as this program should help prevent housing prices from crashing far below their long-term values, and therefore prevent a further depletion of households’ spending power."

In the long term, Johnson said investment in basic infrastructure like highways and bridges is needed, along with job training programs and an expansion of student loan programs.

He said lawmakers should "think about a world in which the U.S. recession will last four to five quarters," with gross domestic product shrinking at up to 3 percent annually, followed by two to three years of slow growth.

To counter a downturn of that magnitude, Johnson thinks a stimulus package of around $450 billion spread over three to four years is needed.

But with the federal deficit expected to balloon to nearly $1 trillion, lawmakers are likely to balk at such drastic measures.

In a radio interview last week, Speaker of the House Nancy Pelosi, D-Calif., said Congress is looking at a stimulus package "more in the $100 billion range."

With so many demands being placed on Congress from so many directions, a stimulus bill of that size may not include much for the housing and real estate industries.

***

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