point of view

A key step to avert foreclosures

March 14, 2009 

— 'Everyone complains about the weather, but nobody does anything about it." If Mark Twain were alive today, he'd probably want to amend his famous saying to something like this: "Everyone complains about the mortgage foreclosure crisis, but nobody in Washington wants to do anything about it -- at least not if they're worried about upsetting lending industry lobbyists."

How else to explain that, while homeownership continues to melt away like butter in a hot skillet, numerous lawmakers (perhaps even both of North Carolina's U.S. senators) continue to stand in the way of long-overdue bankruptcy reforms that could keep hundreds of thousands of families in their homes, paying a fair mortgage payment?

America is in the midst of an economic pandemic. The mortgage foreclosure virus has taken hold of millions of households with devastating effect. More than 46,000 North Carolina families are expected to succumb to the virus this year. There are lots of related causes -- job losses, the "housing bubble," the recession it helped create, predatory lenders that lured millions into unaffordable loans, and, yes, some foolish homeowners and home buyers who got in over their heads. Over the coming years, there will be ample time to examine the root causes, to assess where our systems failed and to enact new regulations.

The question at this point, however, isn't "who's at fault?" It's "what do we do about it right now?" How do we stop the foreclosure crisis in its tracks?

In Washington the foreclosure debate divides roughly into two camps: those who favor strong and immediate action to quarantine the virus and those who want to complain about it, but whose main recommendation is to rely upon the "natural" rules of the market to address it.

The quarantine camp is led by some thoughtful and courageous lawmakers such as North Carolina Rep. Brad Miller. They are championing legislation supported by the president that would allow the use of some strong and simple medicine.

Under their proposal, federal bankruptcy judges would be empowered to modify mortgage loans of those families that wind up in bankruptcy so that their loan terms and monthly payments are more reasonable. The idea is simple and has long been used for real property like vacation homes and personal property such as boats and manufactured homes: Lenders would get a little less each month, but at least they would get something fair.

Such a simple and straightforward change would likely save hundreds of thousands of family homes and help stabilize millions of lives. Thousands of neighborhoods and local governments would also reap the benefit of more stable property values and tax bases.

Unfortunately, the proposal has met with strenuous opposition from many elements of the influential lending industry. These lenders, many of which continue to benefit directly from direct government aid themselves, argue with a straight face that it would be inappropriate for the government to intervene in the loan contracts borrowers have signed. They claim that such change could raise the cost of home loans in the future and encourage consumers to choose bankruptcy. Instead, they argue, the "natural" forces of the market should be allowed to take their toll. As a fallback, they argue for limiting the remedy to so-called subprime loans.

In any fair battle of ideas, such arguments would be dismissed as self-serving and hypocritical absurdity. Lke a lot of political battles, this is not a fair fight so long as the industry retains the money and political clout it has long held.

In North Carolina, that clout already helped to persuade newly elected Democratic Rep. Larry Kissell to abandon his constituents and colleagues when the proposal passed the House. Now the industry has its sights set on Kissell's fellow Democratic newcomer, Sen. Kay Hagan. According to the senator's office, Hagan has yet to decide whether she will stand with Miller and the rest of the state's House Democrats (plus Republican Walter Jones) or with the banks, Kissell and her Senate colleague, Republican Richard Burr.

At last report, the Senate was expected to take up the issue any day and the vote was expected to be close. Let's hope that at this time of profound economic crisis, North Carolina's newest senator stays true to her campaign message of hope and change and stands with those who favor doing something more than merely the bidding of a powerful industry.

Rob Schofield is the director of research at N.C. Policy Watch.

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