The recent Bail Out bill passed by Congress has failed to address the root of our current economic crisis — the drowning homeowner. Six million people are expected to default on their mortgages in 2008 and 2009. They’re not alone, as housing values plummet, millions of people who have never missed a mortgage payment risk losing tens of thousands of dollars in home equity.
The bailout package passed by Congress does virtually nothing to assist troubled homeowners whose inability to pay has all but sunk the financial markets. It is incredibly disappointing that provisions previously discussed in both the House and the Senate to help homeowners modify their loans and save their homes from foreclosure have been mostly abandoned. These provisions would have struck at the root of the problem and helped to stop the declining home prices, provided relief through the bankruptcy courts, required lenders to offer affordable loan modifications, and unburdened families from taxes associated with restructuring predatory loans.
But instead of expressing a sense of urgency in helping homeowners, Congress has only taken tentative steps to throw borrowers a lifeline. For instance, a new government program called Hope for Homeowners was approved with the aim of helping as many as 400,000 struggling homeowners escape foreclosure. But even before it has started this program is looking more like a false hope than a grand savior. Under the program, the government will insure up to $300 billion in new, affordable loans for borrowers struggling to pay their mortgages. But for homeowners to take advantage of the program, lenders must first voluntarily refinance the delinquent mortgages by reducing the loan balances to 90 percent of the home’s current market value. This would be a win-win situation, allowing lenders to escape the avalanche of foreclosures on the horizon and receive reassurance that they will be paid. But at a Congressional hearing in September, lenders expressed their hesitancy about participating in Hope for Homeowners. Lenders such as JPMorgan Chase, Bank of America, Wells Fargo and CitiMortgage, a unit of Citigroup, all said they would take other steps to help troubled borrowers, like reducing a loan’s interest rate or extending its repayment term. In other word’s they don’t want to eat the cost of reducing loan balances.
This industry has already shown us that their efforts of reducing rates and extending terms have done nothing to stall the cascade of defaults and foreclosures destroying the economy. The problem is that the value of many of these homes are rapidly crashing creating an environment where many home values are significantly less than the mortgage attached to the property. That’s a recipe for disaster. What would you do if you’re home’s value was worth 20% less than the mortgage you were paying? Many homeowners are abandoning their homes with destructive consequences; but still lenders refuse to reduce these home loans to the true value of the property. The mortgage industry had a hand in creating this crisis by selling unaffordable loans to cash strapped homeowners, yet they still have the power to call the shots and dictate the terms of how we will get out of this mess. Congress needs to change this dynamic by amending the bankruptcy code and empowering courts to modify troubled mortgages and save this sinking ship.