Housing bill finally getting passed? And at what cost?

It looks like the long-awaited, long-debated housing bill will finally be passed and signed into law, according to the AP. As a reminder, this is the bill with various provisions related to Fannie Mae, Freddie Mac, the FHA loan program, and more. Here's an excerpt from the story:

"The bill would let hundreds of thousands of homeowners trapped in mortgages they can't afford on homes that have plummeted in value escape foreclosure by refinancing into more affordable, fixed-rate loans backed by the Federal Housing Administration. Lenders would have to agree to take a substantial loss on the existing loans, and in return, they would walk away with at least some payoff and avoid the often-costly foreclosure process.

"The plan also creates a new regulator with tighter controls for Fannie Mae and Freddie Mac and modernizes the FHA.

"It includes about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time home buyers for people who bought homes between April 9, 2008, and July 1, 2009. It also allows people who don't itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes. That chiefly benefits homeowners who have paid off their homes and can't claim a deduction for mortgage interest.

"And it increases the statutory limit on the national debt by $800 billion, to $10.6 trillion."

My view about these provisions, like all the other bailout/rescue programs we've seen is simple: Every little bit helps, but there is no magic bullet to cure the housing and mortgage markets. The bubble was years in the making, and the recovery will take years as well.

There is a real question about the impact of all these bailouts on interest rates, too. Treasury yields have been steadily rising in recent weeks amid concerns about the cost to the government of bailing everyone and his sister out. Some are also wondering whether Fannie and Freddie can really afford to step up and buy billions and billions of dollars worth of additional mortgages and mortgage securities, given the market's capital concerns.

For now, as Bloomberg notes this morning, higher rates are already impacting mortgage demand:

"Mortgage applications in the U.S. dropped 6.2 percent last week, led by declining demand for loans to purchase homes as interest rates jumped.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan fell to 489.6 in the week ended July 18 from 522.2 the prior week. The group's refinancing gauge declined 5.6 percent while the purchase index decreased 6.7 percent.

The average rate on a 30-year fixed mortgage reached the highest level in a year, threatening to deepen the U.S. housing recession and prolong the economic slowdown. Lenders are charging more for home loans after posting billions of dollars of losses resulting from the credit rout. That has sent rates higher even after the Federal Reserve lowered interest rates seven times.

There's certainly no sign of recovery at this point,'' James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said before the report.

"The mortgage bankers' applications index reached 461.3 a month ago, the lowest level in almost seven years.

"The average rate on a 30-year fixed-rate loan jumped to 6.59 percent last week from 6.22 percent, today's mortgage bankers report showed. The rate is the highest since the week ended July 20, 2007. At the current rate, monthly borrowing costs for each $100,000 would be $638, up $70 from the 2008 low in January."