Monday, February 25, 2008

Rescuing The Drowning Homeowners

Rescuing The Drowning Homeowners

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A new report from Moody's Economy.com states that 8.8 million homeowners, or 10.3 percent of the total, are "underwater," meaning they owe more on their homes than the homes are worth. Mark Zandi, the site's chief economist, observed, "The last time we saw so many homeowners with so many home values that were worth less than the amount of mortgage they owed was back in the Great Depression." As the housing crisis continues to slow the economy, effective solutions from the government are needed immediately. The 8.8 million figure is double the percentage of just a year ago, and by the end of 2008, as many as 15 million U.S. households may be underwater, according to Jan Hatzius of Goldman Sachs. This increase may "fuel an increase in foreclosures, erode prices and increase mortgage bond losses." As Sen. John Kerry (D-MA) writes today in the Boston Herald, "If we really want to address the economic anxieties of the average American, we must deal with the mortgage crisis and help hard-working families keep their homes."

ACTION IS NEEDED: "Our country faces a likely serious and possibly devastating economic downturn. Policymakers must act to stem the severity to the extent they can," notes John Podesta and Laura Tyson of Center for American Progress (CAP). Foreclosures jumped 75 percent nationally for all of 2007, and a recent report from the Joint Economic Committee estimates that over $100 billion in housing wealth will be lost through 2009. Housing prices have now declined for 11 consecutive months. Some observers seem remarkably cavalier about the enormous potential loss of American wealth, retirement, and education savings represented by plummeting home values for not merely subprime borrowers, but for whole communities, arguing that this is "just a natural correction of the market and that policy makers should let market forces play themselves out." President Bush continues to insistgreat danger of a over-correction with house prices in freefall. "The risks to the financial health of families are simply too high," notes CAP Senior Fellow Christian Weller. "The economy needs a dual solution. For one, income has to grow faster and families need to work out solutions for the mortgages that they cannot pay." The free-fall in home prices in many communities undermines refinancing options for all homeowners. CAP has also proposed a Great American Dream Neighborhood Stabilization Fund (GARDNS), along the lines of the recent proposal in Senate Majority Leader Harry Reid's (D-NV) Foreclosure Prevention Act legislation, moving funds to states and localities to acquire foreclosed properties quickly before neighborhoods deteriorate to the point of pricing collapse and blight.

NO MORE LIP SERVICE: Voluntary efforts and the limited interest rate moratorium offered by Secretary Paulson's Hope Now Alliance are too little, too late. Lawmakers are considering ways to aid the class of "underwater" borrowers, keep more people in their homes, and prevent prices from continuing to fall. The best proposals will ensure that those financial institutions that irresponsibly made credit available will take serious losses. This would not be a bailout, but instead would be a way to facilitate a transfer the loans to new lenders who can restructure these loans on sustainable terms. Senate Banking Committee Chairman Chris Dodd (D-CT) expressed interest in a plan to develop a new agency for this kind of transfer. House Financial Services Chairman Barney Frank (D-MA) is considering a variety of proposals. CAP Senior Fellow Michael Barr discussed the Saving America's Family Equity -- or SAFE loan plan -- inspired by the Home Owner's Loan Corporation created to deal with foreclosures in the Great Depression. To speed assistance to borrowers, the SAFE plan envisions using existing entities like the Federal Housing Administration, Fannie Mae, Freddie Mac, and Treasury to transfer the mortgages and offer new products for loans that better reflect the value of the homes and the borrower's capacity to repay.

STATES ACT: As they get hit by the housing crisis, states are demanding action, "calling on the Bush Administration to deliver a comprehensive solution to the ongoing mortgage crisis." Govs. Martin O'Malley (D-MD), Eliot Spitzer (D-NY), and Jon Corzine (D-NJ) said the two plans offered by the Bush Administration "exclude the majorityprovide money quickly and efficiently to local nonprofits or cities to buy foreclosed or vacant absentee-owned homes and offer them, as quickly as possible, for sale to qualified low- and moderate-income families on affordable terms."
that the economy is fine. Conservative housing experts like the American Enterprise Institute's Alex Pollack even agree there is of homeowners who need help." "The Administration should also take responsibility for the role of federal regulators and national banks in this crisis, and engage in greater collaboration with states in the development of a solution to this problem and a preventive strategy for the future," they said. Neil Pierce today says the GARDNS proposal is "appealing," as it would "

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