With foreclosure proceedings starting on more than 6,000 homes a day, House and Senate lawmakers are advancing similar versions of a measure that could help many troubled borrowers. Lenders and investors also would come out ahead of where they'd be if they had to repossess the homes. And although it wouldn't stop home prices from dropping further, it could help the market level out sooner, reducing the drag on the rest of the economy.
Still, critics of the proposal (HR 5830:h.r.05830: in the House and known in the Senate as the Federal Housing Finance Regulatory Reform Act of 2008) complain that it would bail out bankers and borrowers who placed losing bets on a volatile housing market. The potential beneficiaries would include lenders that doled out jumbo loans to borrowers with no proof of their ability to repay, investors who paid premiums for packages of risky mortgages and home buyers who counted on rising property values to rescue them from debt loads they couldn't afford.
Those aren't the only ones who stand to gain from the bills, however -- or to lose if the rate of foreclosures doesn't abate. As the Wall Street Journal has reported, a high percentage of the borrowers stuck in costly sub-prime loans were steered into those mortgages by brokers and lenders even though they qualified for lower-interest prime loans. More important, foreclosures are driving down the value of entire neighborhoods and putting more borrowers at risk of owing more than their houses are worth -- making it almost impossible for them to refinance or obtain new credit. Unless borrowers get more help, the high rate of foreclosures is expected to continue well into next year.
The latest statistics from the banking industry show that voluntary efforts by lenders to rescue homes from repossession haven't stopped foreclosures from rising. That's why it makes sense for lawmakers to help the industry help itself by giving lenders and investors more incentive to modify loans. The Senate version attaches meaningful strings to its aid, as well as imposing tougher standards on Fannie Mae, Freddie Mac and mortgage brokers. In order to obtain government-guaranteed refinancing, lenders would have to write off a significant portion of the original loan, and the new mortgage would have to be on more affordable terms. Borrowers who can't prove that they meet federal standards for repayment ability won't qualify for help. And the bill would have government-sponsored Fannie Mae and Freddie Mac, not taxpayers, supply funds for refinancing loans.
It's not a risk-free approach, but compared to the damage threatened by the looming wave of foreclosures, it's a small price to pay.