Gary J Carter
2008-08-07 20:36:36 UTC
One Million Homes Lost and Counting: How to End the Foreclosure Crisis
Now
By Fred Moseley, Dollars and Sense. Posted August 2, 2008.
The government should be working to protect homeowners, not the
lenders that got us into this mess.
Over one million U.S. homeowners have already lost their homes due to
foreclosures since the mortgage crisis began last summer. Another one
million homeowners are 90 days past due on their mortgages
(foreclosure notices usually go out after 90 days) and two million
more are 30 days past due, so three million more households may face
foreclosure in the months ahead. If current policies do not change, it
is estimated that up to five million homeowners would lose their homes
due to foreclosure over the next few years. Five million is roughly
10% of the total number of homes with mortgages. This is clearly the
worst housing crisis since the Great Depression, and will wreck havoc
in the lives of millions of families unless something is done. A high
foreclosure rate also has a deteriorating effect on surrounding
neighborhoods, further depressing housing prices and quality of life.
Many of those facing foreclosure are low- to middle-income homeowners
who were enticed into buying houses by fraudulent mortgage companies
and low "teaser" interest rates that are adjusted up ("reset") after
two to three years. As long as housing prices were increasing,
homeowners could always refinance their mortgages and get a new teaser
rate for another few years. However, now that house prices are
falling, these homeowners can no longer refinance, and many of them
cannot afford to pay the higher interest rates when they are reset.
Falling prices also mean that many of these homeowners owe more on
their mortgage than the current value of their house (i.e. they have
"negative equity" in their house). The recession is also resulting in
declining employment and income, meaning even more homeowners are
struggling to make their monthly mortgage payments. The further
housing prices decline, and the worse the recession is, the worse the
foreclosures will be, in a vicious cycle.
Clearly, the federal government must take some positive actions to
stop the spreading foreclosures, especially for low- and middle-income
families, who would suffer the most. But what should those actions be?
At a minimum, policies should apply only to owner-occupied homes, and
not to "investor" or "speculative" homeowners (those who buy houses in
order to sell them later at a higher price). But beyond this, various
policies have been proposed, and not all of them would truly help
homeowners at risk.
Workouts, Not Bailouts
There are two main types of anti-foreclosure policies: bailouts and
workouts. In bailouts, the government gives aid either to lenders
(e.g. by purchasing bad mortgages at their full original value) or to
homeowners (e.g. by giving them loans so they can repay their
lenders). Of course, aid to homeowners indirectly bails out the
lenders as well. In workouts, the terms of the original mortgage
contract are modified, either by reducing the rate of interest or
reducing the principal owed, or both, in order to make the loan more
affordable. So far, most of the proposals to deal with the foreclosure
crisis have been more workouts than bailouts, although there are
elements of bailout in some of them as well. The lenders made fortunes
on these risky mortgages during the housing bubble, so if someone has
to suffer losses now, it should be the lenders. There should be no
bailouts of the lenders in any way.
Lender-Initiated Workouts
There are two types of workouts, depending on whether they are
initiated by the lenders or the homeowners. Most of the policies
proposed and enacted so far have been initiated by the lenders, i.e.,
they are voluntary on the part of the lenders. The main policy of the
Bush administration is called "Hope Now," in which the lenders
voluntarily postpone the resets of interest rates that are scheduled
to take place in the months ahead, and leave the principal of the loan
unchanged (or sometimes the foregone interest is added to the
principal). The Bush administration claims that over 500,000 mortgages
have been modified in this way in recent months, and estimates that
another 500,000 mortgages will be modified in the months ahead.
However, critics argue that these numbers are exaggerated and that
many of these modifications have been simply allowing homeowners more
time to make the same payments. It is likely that in the months ahead,
many of these homeowners still will not be able to make their
payments, and many of them will be foreclosed on, which has led some
critics to call this the "No Hope" plan. The only lasting solution is
to reduce the mortgage principal owed to more affordable levels. The
main problem now is not the reset of interest rates, but rather
declining housing prices, which has the effect that more and more
homeowners now owe more money on their mortgage than their house is
worth.
The House of Representatives has recently passed a bill (H.R. 5830,
introduced by Rep. Barney Frank, D-Mass.) that is primarily a workout,
but also is potentially part bailout, and is also lender-initiated The
bill would replace existing mortgages with new mortgages that would
have a value of 85% of the current market value of the houses, and
these refinanced mortgages would be guaranteed by the Federal Housing
Administration (how this "current market value" is to be determined is
a crucial detail which so far has not been specified). This 15%
"write-down" of the principal, plus the prior 10% decline of prices
means that the total write-down for lenders will be approximately 25%.
For example, a homeowner with an original mortgage of $300,000 would
have the principal reduced to $225,000, and the monthly payments
reduced by a similar proportion. The bill appropriates $300 billion
for this purpose, which it estimates could help up to 1.5 million
homeowners. A similar bill appears likely to pass in the Senate
(introduced by Christopher Dodd, D-Conn.). President Bush initially
threatened a veto, but has now said he will sign the bill. In any
case, it does not appear likely that many lenders will "volunteer" for
this writedown.
Another problem with this bill is that housing prices in some areas
are likely to fall more than an additional 15%. Mortgages on these
houses are likely to be the ones that the lenders will voluntarily
refinance, and any further losses would have be borne by the
government (i.e., by the taxpayers). This would be a partial bailout
of the lenders.
Homeowner-Initiated Workouts
Another bill has been introduced into the House (H.R. 3609) and Senate
(S. 26360) that would provide workouts that would be initiated by the
homeowners and would be mandatory for the lenders. These bills would
allow bankruptcy judges to modify mortgage contracts (by reducing the
principal and/or by reducing the interest rate) in order to make
monthly payments more affordable for homeowners. It used to be
possible for bankruptcy judges to modify mortgage contracts, but this
was explicitly prohibited in a 1993 bankruptcy law. One can see the
hand of the mortgage bankers in the writing of that provision.
Modifications on other types of loans are allowed: for investment
properties, for vacation homes, and even for boats, but no
modifications allowed for primary residences! So all that needs to be
done is to delete this one phrase in the law which prohibits
modifications for primary residences. A significant advantage of this
plan is that it would not cost taxpayers anything.
One problem with this bill is that homeowners would have to declare
bankruptcy, which is expensive (about $2000) and would hurt their
credit rating in the future. But at least they would still have their
home, with an affordable mortgage, and thus would have the chance to
restore their credit rating.
This bill is supported by the AFL-CIO, SEIU, NAACP, ACORN, the Center
for Responsible Lending, and many other consumer protection groups. It
is of course strongly opposed by the Mortgage Bankers Association, and
does not seem to have enough support for passage at the present time.
Another homeowner-initiated plan has been proposed by Dean Baker of
the Center for Economic and Policy Research. According to this
"own-to-rent" plan, homeowners faced with foreclosure would have the
option to stay in their houses as tenants, rather than as owners, and
would pay the prevailing rental rates, which are generally much lower
than mortgage payments. Eligibility for the plan would be capped at
the median house price in a metropolitan area and thus would not
benefit high-income homeowners. This plan also would not cost
taxpayers anything. A bill along these lines was recently introduced
in the House (H.R. 6116).
Looking Ahead
The presidential candidates have had disappointingly little to say
about the foreclosure crisis and anti-foreclosure policies. Senator
Barack Obama has expressed support for the Frank-Dodd FHA bill, but
not yet for the bankruptcy modification bill. In good Republican
tradition, McCain advocates "no government intervention." But the
foreclosure crisis is likely to worsen in the coming months, and the
public may well demand more policies to address this growing problem.
The homeowner-initiated policies are preferable because they provide
the most protection for homeowners against foreclosure. Both of these
options should be available to homeowners facing foreclosure,
especially for those with low or moderate incomes.
The guiding principles of government anti-foreclosure policies should
be: (1) homeowners should be allowed to stay in their homes; and (2)
there should be no bailouts for the lenders. And the long-run
objective of government housing policies should be: decent affordable
housing for all.
Fred Moseley is a professor of economics at Mount Holyoke College. His
publications include The Falling Rate of Profit in the Postwar United
States Economy (1992) and "The Rate of Profit and the Future of
Capitalism," Review of Radical Political Economics, 1997.
Now
By Fred Moseley, Dollars and Sense. Posted August 2, 2008.
The government should be working to protect homeowners, not the
lenders that got us into this mess.
Over one million U.S. homeowners have already lost their homes due to
foreclosures since the mortgage crisis began last summer. Another one
million homeowners are 90 days past due on their mortgages
(foreclosure notices usually go out after 90 days) and two million
more are 30 days past due, so three million more households may face
foreclosure in the months ahead. If current policies do not change, it
is estimated that up to five million homeowners would lose their homes
due to foreclosure over the next few years. Five million is roughly
10% of the total number of homes with mortgages. This is clearly the
worst housing crisis since the Great Depression, and will wreck havoc
in the lives of millions of families unless something is done. A high
foreclosure rate also has a deteriorating effect on surrounding
neighborhoods, further depressing housing prices and quality of life.
Many of those facing foreclosure are low- to middle-income homeowners
who were enticed into buying houses by fraudulent mortgage companies
and low "teaser" interest rates that are adjusted up ("reset") after
two to three years. As long as housing prices were increasing,
homeowners could always refinance their mortgages and get a new teaser
rate for another few years. However, now that house prices are
falling, these homeowners can no longer refinance, and many of them
cannot afford to pay the higher interest rates when they are reset.
Falling prices also mean that many of these homeowners owe more on
their mortgage than the current value of their house (i.e. they have
"negative equity" in their house). The recession is also resulting in
declining employment and income, meaning even more homeowners are
struggling to make their monthly mortgage payments. The further
housing prices decline, and the worse the recession is, the worse the
foreclosures will be, in a vicious cycle.
Clearly, the federal government must take some positive actions to
stop the spreading foreclosures, especially for low- and middle-income
families, who would suffer the most. But what should those actions be?
At a minimum, policies should apply only to owner-occupied homes, and
not to "investor" or "speculative" homeowners (those who buy houses in
order to sell them later at a higher price). But beyond this, various
policies have been proposed, and not all of them would truly help
homeowners at risk.
Workouts, Not Bailouts
There are two main types of anti-foreclosure policies: bailouts and
workouts. In bailouts, the government gives aid either to lenders
(e.g. by purchasing bad mortgages at their full original value) or to
homeowners (e.g. by giving them loans so they can repay their
lenders). Of course, aid to homeowners indirectly bails out the
lenders as well. In workouts, the terms of the original mortgage
contract are modified, either by reducing the rate of interest or
reducing the principal owed, or both, in order to make the loan more
affordable. So far, most of the proposals to deal with the foreclosure
crisis have been more workouts than bailouts, although there are
elements of bailout in some of them as well. The lenders made fortunes
on these risky mortgages during the housing bubble, so if someone has
to suffer losses now, it should be the lenders. There should be no
bailouts of the lenders in any way.
Lender-Initiated Workouts
There are two types of workouts, depending on whether they are
initiated by the lenders or the homeowners. Most of the policies
proposed and enacted so far have been initiated by the lenders, i.e.,
they are voluntary on the part of the lenders. The main policy of the
Bush administration is called "Hope Now," in which the lenders
voluntarily postpone the resets of interest rates that are scheduled
to take place in the months ahead, and leave the principal of the loan
unchanged (or sometimes the foregone interest is added to the
principal). The Bush administration claims that over 500,000 mortgages
have been modified in this way in recent months, and estimates that
another 500,000 mortgages will be modified in the months ahead.
However, critics argue that these numbers are exaggerated and that
many of these modifications have been simply allowing homeowners more
time to make the same payments. It is likely that in the months ahead,
many of these homeowners still will not be able to make their
payments, and many of them will be foreclosed on, which has led some
critics to call this the "No Hope" plan. The only lasting solution is
to reduce the mortgage principal owed to more affordable levels. The
main problem now is not the reset of interest rates, but rather
declining housing prices, which has the effect that more and more
homeowners now owe more money on their mortgage than their house is
worth.
The House of Representatives has recently passed a bill (H.R. 5830,
introduced by Rep. Barney Frank, D-Mass.) that is primarily a workout,
but also is potentially part bailout, and is also lender-initiated The
bill would replace existing mortgages with new mortgages that would
have a value of 85% of the current market value of the houses, and
these refinanced mortgages would be guaranteed by the Federal Housing
Administration (how this "current market value" is to be determined is
a crucial detail which so far has not been specified). This 15%
"write-down" of the principal, plus the prior 10% decline of prices
means that the total write-down for lenders will be approximately 25%.
For example, a homeowner with an original mortgage of $300,000 would
have the principal reduced to $225,000, and the monthly payments
reduced by a similar proportion. The bill appropriates $300 billion
for this purpose, which it estimates could help up to 1.5 million
homeowners. A similar bill appears likely to pass in the Senate
(introduced by Christopher Dodd, D-Conn.). President Bush initially
threatened a veto, but has now said he will sign the bill. In any
case, it does not appear likely that many lenders will "volunteer" for
this writedown.
Another problem with this bill is that housing prices in some areas
are likely to fall more than an additional 15%. Mortgages on these
houses are likely to be the ones that the lenders will voluntarily
refinance, and any further losses would have be borne by the
government (i.e., by the taxpayers). This would be a partial bailout
of the lenders.
Homeowner-Initiated Workouts
Another bill has been introduced into the House (H.R. 3609) and Senate
(S. 26360) that would provide workouts that would be initiated by the
homeowners and would be mandatory for the lenders. These bills would
allow bankruptcy judges to modify mortgage contracts (by reducing the
principal and/or by reducing the interest rate) in order to make
monthly payments more affordable for homeowners. It used to be
possible for bankruptcy judges to modify mortgage contracts, but this
was explicitly prohibited in a 1993 bankruptcy law. One can see the
hand of the mortgage bankers in the writing of that provision.
Modifications on other types of loans are allowed: for investment
properties, for vacation homes, and even for boats, but no
modifications allowed for primary residences! So all that needs to be
done is to delete this one phrase in the law which prohibits
modifications for primary residences. A significant advantage of this
plan is that it would not cost taxpayers anything.
One problem with this bill is that homeowners would have to declare
bankruptcy, which is expensive (about $2000) and would hurt their
credit rating in the future. But at least they would still have their
home, with an affordable mortgage, and thus would have the chance to
restore their credit rating.
This bill is supported by the AFL-CIO, SEIU, NAACP, ACORN, the Center
for Responsible Lending, and many other consumer protection groups. It
is of course strongly opposed by the Mortgage Bankers Association, and
does not seem to have enough support for passage at the present time.
Another homeowner-initiated plan has been proposed by Dean Baker of
the Center for Economic and Policy Research. According to this
"own-to-rent" plan, homeowners faced with foreclosure would have the
option to stay in their houses as tenants, rather than as owners, and
would pay the prevailing rental rates, which are generally much lower
than mortgage payments. Eligibility for the plan would be capped at
the median house price in a metropolitan area and thus would not
benefit high-income homeowners. This plan also would not cost
taxpayers anything. A bill along these lines was recently introduced
in the House (H.R. 6116).
Looking Ahead
The presidential candidates have had disappointingly little to say
about the foreclosure crisis and anti-foreclosure policies. Senator
Barack Obama has expressed support for the Frank-Dodd FHA bill, but
not yet for the bankruptcy modification bill. In good Republican
tradition, McCain advocates "no government intervention." But the
foreclosure crisis is likely to worsen in the coming months, and the
public may well demand more policies to address this growing problem.
The homeowner-initiated policies are preferable because they provide
the most protection for homeowners against foreclosure. Both of these
options should be available to homeowners facing foreclosure,
especially for those with low or moderate incomes.
The guiding principles of government anti-foreclosure policies should
be: (1) homeowners should be allowed to stay in their homes; and (2)
there should be no bailouts for the lenders. And the long-run
objective of government housing policies should be: decent affordable
housing for all.
Fred Moseley is a professor of economics at Mount Holyoke College. His
publications include The Falling Rate of Profit in the Postwar United
States Economy (1992) and "The Rate of Profit and the Future of
Capitalism," Review of Radical Political Economics, 1997.