In October 2007, John McWeeney, president and chief executive of NJ Bankers, a statewide banking trade association, commented on the subprime crisis, saying that while some homeowners are able to work with their lenders to hold onto their homes, “Many homeowners can’t be helped. The horse is out of the barn on this one. Millions can’t refinance and will lose their homes.” The horse being talked about is the exploding adjustable rate mortgage (ARM), which is creating havoc in thousands of communities nationwide.
The potential consequences of foreclosure, like those associated with any serious problem, do not exist in a vacuum. Foreclosure stifles the tax collection rate, which threatens the delivery of services to everyone. Properties in foreclosure are quickly abandoned, leading to a devastating downward spiral for the community, as they become havens for unsavory characters and criminal activity.
According to the Center for Responsible Lending, over two million homeowners across the nation face foreclosure and could lose their homes. In September alone, New Jersey had 5,162 foreclosure filings and ranked 13th in the nation. The Star-Ledger recently reported that up to 40,000 borrowers in the state have fallen behind on their mortgage payments and are facing foreclosure.
By now, most policymakers at the local, state and federal levels have realized the staggering fallout from the subprime lending boom of the past several years. As financially strapped homeowners struggle to keep their homes, the communities in which they live also confront economic distress from decimated neighborhoods and a declining tax base.
As Elizabeth Rodriguez, vice president and community affairs officer for the Federal Reserve Bank of New York in Manhattan, told The New York Times, “This is a real mess, not only from the point of view of its impact on the housing market, but on communities. You’ve got a lot of good money that has gone into rebuilding these communities that now is compromised seriously by what could be this wave of foreclosures.”
Responding appropriately to this crisis requires a multi-pronged approach. While a few lenders are able to work with their customers, recent changes in the way mortgages are bought and sold deter modification of the loans. The current crisis demands solutions similar to those policymakers have devised in other times of financial crisis. Homeowners, many of whom were deceived into purchasing unaffordable subprime loans, also need a comprehensive rescue package.
Some progress is being made. At the federal level, the White House has enabled the Federal Housing Administration to help some homeowners refinance their existing mortgages. And Congress is pursuing several options designed to make existing loans more affordable or otherwise prevent foreclosure. As part of this package, Congress should amend the bankruptcy law to allow for modification of a borrower’s mortgage. This option is not currently available to a bankruptcy judge. This proposal would be especially helpful to borrowers whose homes have declined in value and who cannot refinance their loans.
Currently, the law prevents bankruptcy judges from modifying mortgage debt on an individual’s or family’s primary residence, even though it does permit judges to modify mortgages on investment properties and vacation homes. Clearly, that law is upside down and needs correction.
How absurd is a law that prevents judges from protecting the homes of low- and moderate-income people, but allows the protection of vacation homes of the wealthy? On top of that, bankruptcy judges can modify loans for a home on the family farm and for owners of commercial real estate—just not on the home for the average citizen.
Legislation amending the Bankruptcy Act to help homeowners has been introduced by Representative Brad Miller (D-NC) and Representative Steve Chabot (R-OH), as well as Senator Richard Durbin (D-IL) and Senator Arlen Specter (R-PA). Congress should act quickly to help homeowners keep their homes and preserve neighborhoods across the country that are threatened by the impending foreclosures.
Bankruptcy protection—in the form of loan modification—for the 600,000 families facing foreclosure should be a no-brainer. This approach makes economic sense, since lenders and investors lose a lot more through foreclosure than they would through modification, and it will not hurt the housing or credit markets. Mortgage payments will continue to flow to lenders; families will stay in their homes; communities won’t deteriorate, and real estate taxes will help local governments.
Of course, this is just one measure that needs to be addressed among many others. In June of this year, the nation’s mayors passed policy that calls for broader federal legislation that will implement practices that would help borrowers understand their mortgage terms; require and tighten the licensing of mortgage brokers; and toughen federal lending standards that increase protection for consumers and improve the mortgage lending process.
We must limit the negative effects of the current mortgage crisis for American families, but we should also do everything we can to ensure that it does not happen again. As a nation, it is possible for us to provide hard-working Americans access to credit, while at the same time, fostering a sound financial lending system