Penny Wise, Pound Foolish on Foreclosure Politics?
The New York Times's lead editorial today, "Foreclosure Politics," opens with some important points about the expensive, irrelevant, and counterproductive tax breaks riddling the Senate's inaptly named "Foreclosure Prevention Act." But from there, the editorial swerves off course and confuses readers about the House bill aimed at preventing foreclosures and minimizing economic pain.
The editorial says that, under the plan by House Financial Services chair Barney Frank (D-MA) to provide $300 billion in refinanced mortgage guarantees, loans could be modified en masse. But the plan also has flaws. One is political: taxpayers could be on the hook if F.H.A. borrowers defaulted. Congress cannot ask taxpayers to step up without doing all it can to solve the problem without shifting the risk to taxpayers. The way to do that is to allow bankruptcy courts to modify mortgages for troubled homeowners.
Taxpayers could be on the hook if the House adopts a plan that the House leadership, the administration, a broad range of regulators and policymakers, and all three presidential candidates have indicated that their support in principle. But taxpayers also might not be on the hook for a penny -- in fact, the federal government might end up making a pretty penny for taxpayers in the bargain.
This is not to say that bankruptcy reform doesn't have a key role in making the Frank plan more effective. But talk about political difficulty! The ink is barely dry on the latest bankruptcy reform, which passed in last Congress overwhelmingly. Members' votes on the bankruptcy issue are not likely to change so soon, certainly not enough to allow an override of a certain Bush veto.
Speculations about whether taxpayers would be on the "hook" under the Frank plan are just that until CBO scores the plan. Better to heed the initial indications CBO itself offered last Friday in a paper bound to be influential on the outcome of the debate, Policy Options for the Housing and Financial Markets:
Direct federal provision or guaranteeing of credit to mortgage markets could help avoid foreclosures and ease the downward pressure on house prices, helping the market to adjust in an orderly manner, [would] involve modest federal subsidies, and would probably affect several hundred thousand homeowners.
The Times editorial itself notes that "with foreclosures running at about 20,000 per week, at least 100,000 more families are likely to lose their homes before Congress passes a relief bill." If count pennies and wait until we have a president who will sign bankruptcy reform, that number could easily exceed a million.
Frankly, I can't follow whatever it is that Dana's arguing.
Of course the taxpayer will have to pay. How else will we bail out the lenders who made bad credit decisions? That's the whole point of these legislative proposals, plans, ideas, whatever.
Sympathetic speechifying about homeowners losing their homes is just populist rhetoric to cover the bailout of the financial community.
April 15, 2008 5:31 PM | Reply | Permalink
this is actually the one policy area in which i do actually have a fairly thorough understanding of the law. i practiced consumer bankruptcy exclusively for several years and dealt with many foreclosure situations. of course, this was from 95 to 2000 and pre the 2004 reforms.
i think i speak for the entire consumer bankruptcy bar when i say the 2004 reforms were amongst the most mean spirited things i have ever seen and i am ashamed of congress for caving to special interest pressure on this. i very nearly abandoned john edwards all together for his vote.
it was an absolute travesty and has served to turn Federal Bankruptcy Courts into a collections arm for shady lending practices.
Ellen, I was able to follow what Dana was saying, but it didn't really add up to much. He notes, correctly, that changes to the bankruptcy code could do a lot to mitigate foreclosures. As a policy point, it would be easy as pie to change the bankruptcy code to deliver precisely the amount of balance between punishing lenders and borrowers through mortgage term modification.
Currently there is no political will to do this which is a shame because it is a very useful choke point.
As for Barney Frank's plan, Dana doesn't describe enough of it to be useful.
He doesn't tell us what a Federal Mortgage Guarantee means. If it means simply that the original lender, who made the bad loan, gets paid in full while the gov't is left to foreclose... well that sucks. His hope that a profit could be made seems far fetched when you consider that similar mortgage backed derivatives have been generating billion dollar losses for banks world-wide.
I don't know what Frank is proposing and Dana doesn't tell us.
I do know that any assumption of the risk by the government should be balanced by write-downs by the banks. they need to share in the pain.
after all, they were the ones who decided to make these stupid loans.
April 15, 2008 9:12 PM | Reply | Permalink
2004 reforms
The cynical among us might not be chastised for thinking that the "reforms" in question emboldened the terro...(wait, that's another emboldening) mortgage lenders to write "ninja" mortgages, secure in the knowledge that they had just vaulted to the status of prospective recipients of sanctioned preferences should the loan go awry.
April 15, 2008 9:18 PM | Reply | Permalink
Here's the only informative thing in the NYT Editorial;
April 15, 2008 9:31 PM | Reply | Permalink
i don't know how to use html tags...
is there a 9 year old in the house?
April 15, 2008 9:32 PM | Reply | Permalink
I agree that a change in bankrupcty laws to allow for loan modifications by bankruptcy courts is a good idea.
I was convinced by the following quote from an op-ed piece in the LA Times by Jack Kemp on January 18, 2008:
....."What is missing is a rational and urgent push to help the estimated 2.2 million families in danger of losing their homes to foreclosure in the near future. Congress is considering a small fix that would have more impact on these families than any other option under consideration: temporarily allowing bankruptcy courts to give the same relief to homeowners on principal-residence mortgages that businesspeople get on real estate investment loans, that farmers get on farm loans and that individuals receive on loans for vacation homes, cars, trucks and boats.
Bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property -- all secured loans, that is, except those secured by the debtor's home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets -- their homes -- and leaves untouched their largest liabilities -- their mortgages."......
April 16, 2008 12:18 PM | Reply | Permalink