NEW YORK — A government-backed mortgage bailout is needed, and it must be done right away.
Before shouting about all the reasons why taxpayers shouldn’t rescue
the profligate who took on more debt than they could handle, think
about this: New research estimates one in 33 subprime borrowers will
foreclose on their homes in the next two years.
That means the mortgage rot could be on the street where you live. And
it could spread to your schools, to your hospitals and to the roads
that you drive on.
This is one of those times when doing the right thing isn’t necessarily fair, but it needs to be done for the greater good.
Foreclosures aren’t someone else’s problem. They hit all of us hard.
Some 40 million homeowners could see their property values and their
municipalities’ tax bases drop by $356 billion over the next two years
if this situation lingers on, according to a recent report from the
nonprofit Pew Charitable Trust.
The rise in foreclosures not only knocks down what your house is worth
— by $8,800 on average, according to the Pew report — it also means
there will be less money for projects in your communities, too, because
of declining tax rolls. At the same time, homes in foreclosure are more
apt to be targets of crime and vandalism.
“If your neighbor forecloses on their house and it sits empty, that
depresses the property value for everyone around it,” said Kil Huh, a
project manager at the Pew’s Center on the States who worked on the
report. “And often houses that foreclose sell for less than what they
would have been worth.”
Clearly something is needed to stop the cycle: Lower home prices lead
to higher foreclosures, which then depress prices even more. Many of
those walking away from their debts are borrowers whose houses are
worth less than their mortgages so they see no incentive to keep paying
what they owe.
Federal Reserve Chairman Ben Bernanke focused on this issue during a
speech Monday night when he urged Congress to take additional steps to
alleviate the problems. He noted some 1.5 million U.S. homes entered
into the foreclosure process last year, up 53 percent from 2006, and
the rate of new foreclosures looks likely to be even higher this year.
“High rates of delinquency and foreclosure can have substantial
spillover effects on the housing market, the financial markets and the
broader economy,” Bernanke said. “Therefore, doing what we can to avoid
preventable foreclosures is not just in the interest of lenders and
borrowers. It’s in everybody’s interest.”
Bernanke and other government officials gave a similar spin in March
after the Fed took extraordinary step of rescuing Bear Stearns from the
brink of bankruptcy due to its credit-market exposure.
The Fed was sharply criticized for brokering the deal that allowed
JPMorgan Chase & Co. to buy Bear Stearns using $29 billion in
special financing that the central bank approved. Government officials
said it was done to stabilize the nation’s financial system.
That’s the same reason why mortgage relief is needed now.
In his comments Monday, Bernanke appeared to throw some support behind
a $300 billion housing-aid package pushed by House Financial Services
Chairman Barney Frank, a Democrat from Massachusetts.
Frank’s measure is estimated to cost $2.7 billion over the next five
years and help some 500,000 homeowners. It would relax standards at the
Federal Housing Administration so it could back more affordable,
fixed-rate loans for borrowers currently too financially strapped to
qualify.
Those homeowners could refinance into new loans if their lenders agreed
to take substantial losses on the original mortgages. Borrowers would
have to show they could afford to make payments on the new loans. They
would have to share with FHA at least half of their proceeds if they
profited from selling or refinancing again.
The House passed the housing aid plan on Thursday, but President Bush says he will veto the bill.
During an interview with The Associated Press on Wednesday, Treasury
Secretary Henry Paulson called the measure too broad. He said the
administration would continue negotiating with Congress for an
acceptable bill, but he did not offer any details of what type of
mortgage relief the administration would support.
“Housing is an important area and there are certain things that we need
to get done there from Congress,” Paulson said. “I view my job as to
work to get something that is acceptable and that the president can
sign.”
But while Washington fiddles, time is slipping by, housing prices are dropping more and the crisis intensifies.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org
