Too Short A Lifeline
The nation is in a mortgage crisis. More than one out of every 14 mortgages "are delinquent as of the end of September -- a 30-year high." According to the Federal Reserve, "another 2 million families could face foreclosure in the next 2 years." In an effort to stem this tide, Treasury Secretary Henry Paulson this week announced "Project Lifeline," a voluntary private sector initiative. Six major mortgage lenders have agreed to send letters "to truant borrowers detailing how they can 'pause' the foreclosure process for 30 days while the bank evaluates whether they're eligible to modify their loan on better terms." Yet like other Bush administration "solutions" to the economic crisis, this one is nothing more than a short-term "voluntary breather" and would perhaps be more aptly called "Project Band-Aid." "Homeowners at risk of foreclosure are floating 50 feet from shore while Project Lifeline throws them a 30-foot rope," said Sen. Dick Durbin (D-IL). "We need a plan that goes further."
MORE THAN MARKET ADJUSTMENT: Earlier this week, the White House released the rosy President's Economic Report. "The best course of action is often to simply allow markets to adjust," the report said. "Markets naturally self-correct, rewarding good strategies and punishing bad ones. ... [A]ny government actions mitigating the outcomes of risky behavior may create perverse incentives for reckless decisions by borrowers and investors who may come to rely on government interventions." But the current mortgage crisis needs more than this voluntary, markets-based approach. As David M. Abromowitz and Andrew Jakabovics at the Center for American Progress note, "Markets will do their part, but not if they are frozen by a freefall in home prices that sucks in otherwise responsible homeowners. Homes are not just another commodity; when widespread foreclosures drive whole neighborhoods into rapid decline." During the 30-day pause, banks will presumably modify the loans to make them more affordable in the long term. But if history is any guide, this outcome is unlikely. Lenders did very few loan modifications in 2007, at the height of the foreclosure crisis. Moody's, the rating agency, notes that at the end of September, just 3.5 percent of loans reset in 2007 had been modified. "What they actually will do is anybody's guess," The New York Times concludes about Bush's voluntary program.
TOO LATE FOR 'TRUST ME': Last May, Senate Banking Committee Chairman Christopher Dodd (D-CT) convened a meeting of major banks and loan servicers that "promised to 'create a permanent solution,' wherever possible, for troubled subprime borrowers." When the industry fell through on those promises, the Bush administration announced "Hope Now" last fall, another voluntary initiative to "delay interest rate increases for borrowers who hadn't yet gone into default." Project Lifeline involves those same lenders. "If the industry had kept the promises they made last May, the other two efforts might not have been needed," writes The New York Times. "So it's unclear why the administration continues to believe that urging the industry to do more is the most effective way to cope with the foreclosure crisis." Additionally, over the past two months, just 36,000 borrowers have taken advantage of a Hope Now toll-free hotline helping borrowers work out loan troubles. But "fewer than a third of those have actually gotten far enough along in the conversation to get advice for a loan workout." According to Carrie Guzman who works for ACORN and advocates for people dealing with foreclosure, Project Lifeline is too little, too late. "Usually once you've hit that 90 days, it's less than 30 days before your sale of share is set," said Guzman, "and the way this plan is written, it excludes people that are within 30 days of the sale, so it gives people very little time to be able to respond."
LENGTHENING THE LIFELINE: Today, Paulson will be testifying before the Senate Banking Committee. "The members of the committee should quickly disabuse him of any notion he may have that he's doing enough," writes The New York Times. "He should be asked to explain, specifically, what will be different at the end of Project Lifeline's 30-day timeout." American Progress has proposed two plans to restore equilibrium to the housing market. First is the SAFE loan program, which "is modeled after the New Deal's successful Home Owners' Loan Corporation" but uses existing government resources to "purchase pools of loans at current valueGARDNS, Fund, which would help homeowners in low- and middle-income neighborhoods by providing "money to local housing authorities and non-profit organizations to buy foreclosed properties from banks and return them to productive use as affordable housing." and refinance those loans that are in default or have negative equity into fully amortizing, fixed-rate loans based on the current value of the property." Second is the Great American Dream Neighborhood Stabilization, or