It almost sounds like an economic armageddon: Record level foreclosures. A housing crisis. A global credit crunch. And the chairman of the Federal Reserve is talking recession.
The U.S. Senate, under the gun to help homeowners facing foreclosures and to boost the slumping housing market, debated a foreclosure relief bill last week; on Wednesday, Republican and Democratic leaders reached a tentative agreement.
But the far-from-finalized bill, at least in its present form, doesn’t do enough to help embattled homeowners. The Senate tabled the one provision that would help families stay in their homes — allowing bankruptcy judges to restructure terms of the mortgages.
The tentative bill would give local governments $4 billion in grants to buy and fix up foreclosed houses. States would get $10 billion to issue municipal, tax-exempt bonds to refinance subprime mortgages — mortgages given to people with poor credit and which usually carry high interest rates. Home builders hit by the housing slump would receive a tax break that would allow them to offset recent losses caused by the housing downturn. Buyers who purchase a foreclosed home would receive a $7,000 tax credit.
What would homeowners receive?
Credit counseling, about $100 million worth. The money would also be used to help homeowners negotiate with lenders to help stave off foreclosure. The bill would also force full disclosure of mortgage terms and would oblige lenders to make sure borrowers understand every aspect of the contract.
The bill has already come under fire from members of Congress, as well as consumers and labor groups, who have criticized the bill because of the lack of bankruptcy reform. In a joint statement, the Center for Responsible Lending and the Consumer Federation of America said the Senate’s bipartisan compromise is “a victory for the financial services industry that brought us this mess.” U.S. Sen. Sherrod Brown of Ohio criticized the omission of the provision.
Illinois Sen. Richard Durbin proposed the provision that would give judges the authority to change the terms of mortgages in some Chapter 11 bankruptcy cases. Investment properties would not count, and only the people who live in the house in question could benefit. Borrowers would have to demonstrate that they are unable to pay the mortgage, and the proposal would limit how much the judge could reduce interest rates and how long the mortgage could be extended.
The provision has been met with bitter opposition by President Bush, Republicans and the banking industry. Sen. Lamar Alexander, R-Tenn., said rewriting the bankruptcy laws will cause lenders to raise interest rates and tighten lending standards.
Durbin called it a test that will determine whether the Senate gives in to the mortgage bankers’ lobbying efforts.
The banking and credit card industry won a major victory in October 2005 when the president overhauled federal bankruptcy laws because, in his view, too many debtors were abusing the system and were making credit less available to everyone else. The new law made it more difficult and expensive to file bankruptcy, and required filers to go through a means test to determine how much of their debt they could and should pay back. The banking and credit card industry lobbied heavily for those reforms.
The banking industry, which once pushed for the bankruptcy laws to be rewritten, is arguing that Durbin’s provision would allow judges to intrude on contract law and would drive up mortgage interest rates.
Another provision cut from the plan would have had the Federal Housing Administration guarantee about $400 billion in refinanced loans if lenders were willing to reduce loan amounts to reflect actual market value.
Senators on both sides of the aisle are likely to suggest myriad of amendments before the plan becomes law. House Speaker Nancy Pelosi, D-San Francisco, said the bill will be improved when it reaches the House, and after the House and Senate bring it to its final form. She said she hopes the balance will swing more in favor of homeowners in danger of losing their homes.
The House is expected to take on more aggressive legislative measures this week on behalf of homeowners. Rep. Barney Frank, D-Massachusetts, plans to hold hearings on a plan to earmark $300 biillion in federally guaranteed loans to help refinance the mortgages of up to 1.5 million homeowners at risk of default.
Many Democrats, including president candidates Hillary Clinton and Barack Obama, place much of the blame for the housing crisis on mortgage brokers and lenders, who made loans to people who could not afford them, and who may have duped those borrowers in the process. Borrowers who either didn’t understand the terms of the loan or knowingly entered into a loan they couldn’t afford deserve much of the blame as well. Job losses, medical bills and divorces also play a large part of the problem, although it seems this point is often overlooked.
As Congress bickers over the details, Americans will continue to lose their homes. It’s true that there is no magic cure that will boost the housing market and save every family from foreclosure. Bailing out every embattled homeowner is not feasible, nor is it the government’s or taxpayers’ responsibility. But, hopefully, the political football will take a bounce that favors homeowners in weeks to come; if not the Durbin or Frank plan, then some other provision or plan that actually gets relief to the homeowners who need it, and which goes beyond mere counseling.
On Thursday, Federal Reserve Chairman Ben Bernanke argued, rightly, that it was necessary to commit $29 billion in taxpayer money to help stave off the collapse of large investment bank Bear Stearns, arguing that its collapse would have dealt a devasting blow to the overall economy.
Why then is it out of the question for Congress to intervene into the market to some degree and throw a monetary life preserver to the thousands of American homeowners with financial crises of their own? The foreclosure crisis and the housing slump have already done great damage to the economy, and not even the smartest economists can predict with certainty when things will improve.
