The American dream in reverse
This
is an editorial from The New York Times of October 8.
For
the first time since the Carter administration, homeownership in the
United States is set to decline over a president’s tenure. When
President Bush took office in 2001, homeownership stood at 67.6
percent. It rose as the mortgage bubble inflated but is projected to
fall to 67 percent by early 2009, which would come to 700,000 fewer
homeowners than when Mr. Bush started. The decline, calculated by
Moody’s Economy.com,
is inexorable unless the government launches a heroic effort to help
hundreds of thousands of defaulting borrowers stay in their homes.
These
days, modest relief efforts are in short supply, let alone heroic
ones. Some officials seem to think that assistance would violate the
tenet of personal responsibility that borrowers should not take out
loans they cannot afford. That is simplistic.
The
foreclosure crisis is rooted in reckless — and shamefully
underregulated — mortgage lending. Many homeowners — mainly
subprime borrowers with low incomes and poor credit — are now stuck
in adjustable-rate loans that have become unaffordable as monthly
payments have spiked upward. Their predicament is not entirely of
their own making, and even if it were they would need to be bailed
out because mass foreclosures would wreak unacceptable damage on the
economic and social life of the nation.
The
relief efforts so far have been too little, too late. In August, the
White House established a program to allow an additional 80,000
borrowers to refinance their loans through the Federal Housing
Administration — on top of 160,000 who were already eligible.
That’s not enough. Foreclosure filings soared to nearly 244,000 in
August alone.
Federal
regulators and Treasury officials are urging mortgage lenders and
mortgage servicers to do their utmost to modify loan terms for
at-risk borrowers, but saying “please” hasn’t worked. To be
effective, modifications must reduce a loan’s interest rate or
balance or extend its term, or some combination of the three.
Gretchen Morgenson reported recently in The Times that a survey of 16
top subprime servicers by Moody’s Investors Service found that in
the first half of the year, modifications were made to an average of
only 1 percent of loans on which monthly payments had increased.
What’s
missing is executive leadership to bring together many players,
including lenders, servicers, bankers and various investors. All of
them are affected differently depending on whether and how a borrower
is rescued, which makes it difficult to agree on a rescue plan. But
all of them also made megaprofits during the mortgage bubble. Under
firm leadership, they could come up with a way to modify many loans
that are now at risk.
Democratic
Congressional leaders have called on the Bush administration to
appoint one senior official to lead a foreclosure relief effort. The
White House dismissed the idea, saying, in effect, that it’s doing
enough.
Congress
should move forward on other remedies. The most important is to mend
an egregious flaw in the current bankruptcy law that prohibits the
courts from modifying repayment terms of most mortgages on a primary
home. Two bills, one in the House and one in the Senate, would treat
a mortgage like other secured debt, allowing a bankruptcy court to
restructure it so that it’s affordable for the borrower. That would
give defaulting homeowners and their advocates much needed leverage
in dealing with lenders and servicers. Creditors would presumably
prefer to cut a deal with a borrower rather than be subject to the
decision of a bankruptcy judge.
The
administration and Congress should work to avoid mass foreclosures.
Meanwhile, bankruptcy reform would give borrowers a shot at keeping
their homes.
http://www.nytimes.com/2007/10/08/opinion/08mon1.html?_r=1&oref=slogin
