Falling house prices are driving the collapse of the financial system. But the bailout Bill, even the “sweetened” version that was approved by the US Senate, does little to avert the defaults and foreclosures that are pushing house values ever downward.
At last count, six million people were expected to default on their mortgages this year and next, putting them at risk of losing their homes unless they can catch up in their payments or catch a break on their loan terms. And they’re not the only ones at risk. As prices drop, millions of people who have never missed a mortgage payment stand to lose their home equity.
Leaving these Americans out of the bailout Bill is unwise and unfair, but neither Congress nor the Bush administration has ever shown anywhere near the sense of urgency to rescue homeowners at the bottom of the collapse as they have for the financiers at the top of it.
Take, for example, a new US government programme that took effect on Wednesday with the aim of helping as many as 400,000 struggling homeowners keep their homes. Even before it got started, the programme—called Hope for Homeowners—was looking like a lead balloon.
Under the programme, the government will insure up to $300 billion in new, more affordable loans for troubled borrowers. For the insurance to kick in, however, lenders must first voluntarily refinance the delinquent mortgages by reducing the loan balances to 90% of the home’s current market value.
In exchange, lenders would avoid expense of foreclosure and uncertainty about being repaid. The government would stem the social and economic damage of more foreclosures, at presumably little risk to taxpayers.
There’s just one problem. At a congressional hearing in September, lenders were lukewarm about participating in the new programme—reluctant, it seems, to take the loss that comes with reducing loan balances.
The lenders all said they were taking other steps to help troubled borrowers, like reducing a loan’s interest rate or extending its term. That’s helpful, but the industry’s efforts don’t go far enough: Defaults and foreclosures continue to outstrip efforts to rework bad loans. As home prices fall, the most effective modification is to reduce the loan balance; otherwise, borrowers are in the position of repaying a loan higher than the value of the property. That burden can become unbearable when combined with unemployment or reduced work hours or unexpected expenses such as medical bills.
There are two sides to the mortgage mess. The mortgage industry, in pursuit of upfront fees, deliberately made loans to people who could not afford the payments over time. They justified their actions on the self-serving and unsound basis that rising home values would forever postpone a day of reckoning.
Many borrowers—naively, foolishly or selfishly—took on those loans. Yet, well over a year into the housing bust, the mortgage industry still calls the shots, as if it is a victim of borrowers.
©2008/The New York Times
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