In every crisis lies opportunity – for politicians to pass new laws.The nation’s escalating foreclosure cataclysm is no exception. Federal and state legislators are scurrying to craft bills that aim to help struggling homeowners stave off foreclosure, buoy the sagging real estate market and prevent similar problems in the future.
While that sounds lofty and admirable, the proposals have plenty of critics. Advocates say some are handouts to corporate interests. Mortgage bankers say others would worsen the credit crunch. Then there’s the question of whether some proposals actually would assist homeowners facing foreclosure – or amount to a government bailout for people who made foolish decisions.
Legislation is a moving target, of course. The pending bills are likely to end up considerably changed if they pass, but here is a roundup of some major initiatives on the table in Washington and Sacramento.
FEDERAL BILLS
Hope for Homeowners Act: Championed by Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., this is the most-aggressive solution in play for struggling homeowners.
It would allow the Federal Housing Administration to refinance up to $300 billion in unaffordable mortgages for up to 2 million owner-occupied homes. It would also give states $10 billion to buy and fix up foreclosed homes.
Lenders would voluntarily submit shoddy mortgages for refinancing, taking a drastic haircut on the amount owed in exchange for a lump-sum payoff. Mortgages would be issued for 90 percent of homes’ current values – which are likely much less than the original amount of the mortgage. The FHA would take part of the new loan as a fee, and then would share in future appreciation. Democrats project the government might lose 1 to 2 percent of the $300 billion if refinanced borrowers later default.
Consumer advocates strongly support the bill, but it draws fierce criticism from the White House and Republicans. “This will help those in need who are on the verge of losing their homes,” said Pam Banks, an advocate with the nonprofit Consumers Union in Washington.
Mortgage bankers are positive too, although they’d like to get a share of future appreciation, as well as the option to write off less money on each mortgage.
But David John, a senior fellow at the conservative Heritage Foundation in Washington, said the bill presents “a risk to the taxpayer” if borrowers still default on their refinanced loans. Further, he says, it’s important not to help out people who may have exaggerated their income to get a home. “If there’s a lie at the beginning of the transaction, it shouldn’t be rewarded,” he said.
Foreclosure Prevention Act: This bill, which is fairly far along in the political process, would modernize FHA loans, increasing the agency’s mortgage limit to $550,000.
It provides funds for pre-foreclosure counseling, and $10.9 billion in mortgage revenue bonds for loan refinancing. It gives $25 billion in tax breaks to home builders, as well as domestic airlines, automakers and other manufacturers. It also encourages purchase of already-foreclosed properties, with $4 billion in grants for communities to buy foreclosures and a $7,000 tax benefit for people who buy them.
The bill has the rare distinction of uniting consumer advocates and conservative economists in disdain. “Big tax breaks for home builders is the centerpiece, which we think is atrocious,” said Paul Leonard, West Coast director for the Center for Responsible Lending. “It’s a triumph of lobbying over need,” said John from the Heritage Foundation. Consumer advocates support the FHA reform and counseling money, though.
Bankruptcy reform: Changing the nation’s bankruptcy laws is the single change that consumer advocates say would do most to help people facing foreclosure – but it faces fierce industry and Republican opposition.
The proposed change would allow Bankruptcy Court judges to modify terms of a mortgage, such as writing down its principal to whatever the house is currently worth, lowering the interest rate or changing the contract length.
Consumer advocates say it could save 600,000 homes, but the banking industry says it would erode lenders’ confidence in mortgages by making the collateral less dependable. If mortgages become similar to unsecured credit like credit cards, their interest rates are likely to be significantly higher, in line with those of credit cards, the Mortgage Bankers Association said.
“We think this would help a select group of borrowers at the expense of every other borrower in the marketplace (in the future),” said Stephen O’Connor, senior vice president of government affairs for the Mortgage Bankers Association in Washington.