Weekly Briefing

Will Senators Dole and Burr get out of the way?

The last seven years in Washington have produced plenty of disastrous policy results: the bloody and seemingly endless occupation of Iraq, the ballooning national debt, exploding wealth and income gaps, a complete failure to produce a 21^st Century energy policy, and the meltdown of the national health care system - just to name a few.

Now, in a fitting conclusion to years of remarkably consistent ineptitude, Congress and the President appear bent on assuring that the federal government does essentially nothing to help millions of homeowners throughout the country who are facing foreclosure as a result of the national home mortgage lending crisis.

The crux of the matter in recent weeks revolves around one basic question - a question that, in its very asking, illustrates the central failure of the market fundamentalist ideology as practiced by President Bush and his congressional allies like Senators Elizabeth Dole and Richard Burr.

The question is this: How should the federal government respond to the mortgage crisis - by helping homeowners or by helping big business? More specifically, should Congress provide a method by which predatory home loans can be restructured in court in order to keep families out of foreclosure and in their homes making payments?

The answers provided by the president and his allies are no surprise. In keeping with their dogged (some would say thickheaded) faith in trickledown economics, the president and his allies have chosen option two, big business. Their basic proposal for addressing the mortgage crisis is this: bail out large financial institutions and provide a new round of tax breaks to businesses affected by the meltdown.

The charitable view of these proposals is that they are motivated by faith in the trickledown philosophy - that is, that Bush and Dole and Burr actually believe that they will, over time, help everyone by stabilizing the rich and the powerful. The more cynical view is that such proposals are simply the result of knowing the side on which one's political bread is buttered. Whichever the case, the results are essentially the same.

The Senate shoots down real reform

Right now, Congress is at loggerheads. Nearly four months into 2008, members have failed to reach agreement on foreclosure prevention package. While the powerful combination of a threatened presidential veto and industry lobbying seems to have succeeded in winning acquiescence to a package of business tax breaks, members have failed to act affirmatively on the single most important policy change that might actually help individual homeowners - an amendment to federal bankruptcy law that would permit court-supervised modification of tens of thousands of subprime home loans.

Here's how the experts at the Center for Responsible Lending describe the reasoning behind such a proposal:

"Over the next several years, two-million American families will lose their homes-roughly 20,000 each week.  Because of market declines, these struggling homeowners can neither refinance nor sell their homes. Unless their mortgages are modified to align the loan amount with the value of the home, the foreclosure crisis will continue to get worse.

The damage of foreclosures extends beyond the families who lose their home: 40 million of their neighbors could also lose billions of dollars in hard-earned wealth as home values decline.

There is an effective solution.  We need to lift legal barriers that now prevent struggling homeowners from seeking loan modifications through the courts."

And here's how they describe the proposal itself:

"Increasing loan modifications would be the most effective way to curb the foreclosure epidemic and reduce economic damage. Given the obstacles to voluntary modifications, the only way to achieve meaningful loan modifications on a larger scale is to permit courts to restructure mortgages on family's homes under chapter 13 of the bankruptcy code. Once this process is in place, it is likely that most loan modifications will occur voluntarily outside of court."

In essence, the proposal recognizes the hard reality of the current situation and addresses it head on. Right now, hundreds of thousands of Americans (including thousands in North Carolina) are trapped in loans in which the interest rates have adjusted (some would say "exploded") to the point that mortgage payments are literally unaffordable. Unfortunately, because their homes are now worth less than they owe on the loans, there is no way for homeowners to escape, short of foreclosure.

The modification proposal, which would apply only to existing loans, would permit bankruptcy courts to reduce the secured mortgage amount down to the fair market value of the property. To prevent any kind of abuse, the change would only apply to homeowners who: (1) have received a subprime or non-traditional loan; (2) meet an IRS means test demonstrating they do not have the financial ability to make their house payments; and (3) otherwise would lose their house to foreclosure. The original Senate proposal also allows the lender/investor to recapture any price appreciation if the home is sold before the plan is completed.

In many ways, the modification approach offers a middle ground between doing nothing and adoption of a straight mortgage foreclosure moratorium as has been proposed in some circles. Interestingly, modifications are already permissible on vacation homes and multi-family properties and have apparently produced little in the way of ill effects on mortgage affordability.

Unfortunately however, earlier this month, the Senate defeated a proposed amendment to the foreclosure package that would have included such a provision in the bill. Not surprisingly, opposition to the proposal was spearheaded by big business (which, as usual seems to want to have its cake and eat it too) and the President - who threatened a veto if the amendment was adopted. Both of North Carolina's senators, Elizabeth Dole and Richard Burr opposed the amendment. Neither appears to have even bothered to issue any kind of statement explaining their opposition.

In decrying the action, a coalition of civil rights, consumer and housing groups called the action a serious mistake.

"We are left with a bill loaded with special considerations for mortgage companies and builders that does very little for homeowners who were sold predatory loans by mortgage lenders.

Any final bill hammered out between the U.S. House and Senate that is a serious effort to stem the foreclosure crisis must include meaningful relief to families to modify their mortgage in bankruptcy. Bankruptcy relief will stabilize communities, keep more than half a million families in their homes and provide lenders at least as much income as they would receive through foreclosure.

As the Senate bill stands, we will continue to see foreclosures tear down communities and wipe out the most important source of financial security that most Americans have."

Where things stand

At present, House and Senate conferees are attempting to put together a final package to address the foreclosure issue. Given the desire of lawmakers to "do something" during an election year, it's hard to believe that legislative leaders will allow the negotiations to completely collapse. Unfortunately, while consumer advocates remain hopeful that something good will come out of the talks, neither big business, the Bush administration nor Senators Dole and Burr has thus far given any indication of any flexibility in their positions.

Let's hope that in the days ahead, one of North Carolina senators musters the courage (or feels the necessary pressure) to break with his or her usual pattern of obsequious fealty to the administration and big business. If neither can actually offer anything in the way of positive solutions to the crisis at hand, perhaps at least they can have the decency to get out of the way.

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This entry was posted on Tuesday, April 22nd, 2008 at 6:47 pm and is filed under Weekly Briefing. You can follow any responses to this entry through the RSS 2.0 feed.