Home crisis doesn’t need heroics, just real fixes

THE NEWS TRIBUNE
Last updated: August 7th, 2008 01:24 AM (PDT)

Although having enormous power to borrow and legislate, government crusaders may put only a modest dent in the U.S. foreclosure wave.

The huge mortgage and housing-bailout bill signed by President Bush last week won’t immediately halt 8,500 American homes a day from slipping into foreclosure. Overall, it’s projected that one in eight U.S. homeowners will suffer this fate over the next five years, Sen. Chris Dodd, D-Conn., told Congress late last month.

This leveraged bailout of quasi-government mortgage enterprises and strapped homeowners will rescue 400,000 facing home loss at most, although more than 2 million are imperiled.

In trying to do the right thing in an election year, the law provides modest incentives. It will do nothing to restore equity for those in the worst markets. Those who need loan modifications to stay in their homes might not get the break they need.

Falling home prices are forcing a writedown of home values in neighborhoods in which foreclosures are most pronounced. “Cash-out” corridors in Arizona, Florida, Michigan, Nevada and Ohio are stung because homeowners can’t refinance. They have little or no equity and poor credit ratings.

All of the congressional lifelines thrown to homeowners come with catches. Some of the highlights include:

 • Tax write-off and credit. A standard deduction of $500 for single filers and $1,000 for joint filers will be offered to the 28 million taxpayers who don’t itemize mortgage interest on their federal returns.

 • First-home buyers will be given a refundable tax credit of as much as $8,000 “to help reduce the existing stock of unoccupied homes.” This is little or no help with those currently struggling with payments or foreclosure. It’s actually an interest-free loan that has to be paid back.

 • Refinancing into fixed-rate loans guaranteed by the Federal Housing Administration. If distressed borrowers qualify, borrowers will have to share their equity gains – if any – with the government. Only owner-occupied homes without additional loans qualify. The voluntary program doesn’t start until Oct. 1.

 • Grants for “assistance.” Some $4 billion is earmarked for “communities hardest hit by foreclosures and delinquencies,” although it’s not clear how this money will be spent. Pre-foreclosure counseling will be funded through a $180 million provision.

To bolster the secondary mortgage market, the new law props up mortgage enterprises Fannie Mae and Freddie Mac. The U.S. Treasury will have broad authority to buy their stock and bonds. A new, tougher watchdog agency will police their recovery.

Originally chartered to insure and buy mortgages, the two companies may see their equity wiped out if they can’t reverse their slide. Together, they hold $5.2 trillion in housing debt.

Will the law’s emergency powers restore confidence in the mortgage giants? While the legislation puts American taxpayers on the hook if Fannie and Freddie don’t recover, it will probably do nothing to spur home sales or stop price erosion.

There’s about a 10-month supply of unsold homes on the U.S. market. Raising the limits on loans that federal mortgage insurers can buy to $625,500 will mostly help creditworthy borrowers in expensive and coastal markets, yet it will probably do nothing to brake the slide elsewhere.

If Congress was serious about saving the maximum number of homeowners, any meaningful bailout should have involved a massive writedown of billions in equity in the worst markets. Loan modifications for non-speculators that lowered monthly payments would have also been helpful.

Homeowners will need more help to keep their properties, and this law won’t provide it since much of the assistance is voluntary, and people aren’t getting the aid they need from the financial-services industry.

It’s estimated that some 70 percent of homeowners who are seriously delinquent in their mortgage payments aren’t being helped by lenders or servicers. That’s according to the State Foreclosure Prevention Working Group, a coalition of state attorneys general and regulators.

Much more pressure needs to be put on creditors to lower payments, extend terms, and to accept forbearance and deeds in lieu of foreclosure. These options are all ways to keep people in their homes and are alternatives for anyone in this situation.

If the government can’t slow the foreclosure rout, then prices will continue to fall. That means huge damage to the local and national economies and evaporation of personal wealth.

Should home values drop 25 percent from the 2005 market peak – as many analysts predict they could – that’s about $5 trillion in lost wealth, according to a report by James Lardner, a senior fellow at Demos, a New York-based research organization.

In order to battle the housing crisis aggressively, Congress need not employ any heroism. But a tough dose of economic reality will certainly bolster the cause.

John F. Wasik, co-author of “iMoney,” is a Bloomberg News columnist. The opinions expressed are his own.

Originally published: August 7th, 2008 01:24 AM (PDT)