Punish Speculators, Aid Homeowners in Mortgage Crisis
We are facing the worst housing crisis since the Great Depression. More than a million Americans are at risk of losing their homes. Families watch their life savings disappear as housing values plummet in neighborhoods with boarded-up houses headed to auction. Housing starts are down 30 percent since former Fed Chairman Alan Greenspan said the crisis was largely behind us last fall. Investors are pulling money out of banks -- and out of America -- fearful of the coming credit crunch. This is a tsunami headed our way.
Denial is rife in Washington and Wall Street. In the debate of Republican candidates for president this past weekend, not one question was directed at the crisis. The president has offered no plan for helping those in trouble. When the House passed a modest bill, creating a $900 million fund to help homeowners refinance each year, the president threatened to veto it. Treasury Secretary Henry Paulson worked to create a private fund to help bolster the banks and hedge funds facing billions in losses in mortgage-backed securities, but has offered nothing for homeowners. The banks have started to set aside reserves for losses, but even they have little clue about just how much their securities are worth.
You can trace the roots of this crisis in the financial deregulation that has opened the floodgates to financial speculation. Mortgages are now marketed by ''mortgage brokers'' who pocketed their fees and then sold the mortgages to banks. The banks then chopped the loans up, repackaged them and marketed them as securities to hedge funds, pension funds and other investors. With housing prices rising, hedge fund operators pocketed millions in fees by borrowing short-term money to pay for mortgage-backed securities, confident the prices would continue to rise.
But the bubble burst, housing prices fell, banks tightened up -- and now homeowners are finding it impossible to refinance. Some $300 billion in mortgage loans will be reset by end of 2008. Conservative estimates are that as many as one-quarter of subprime loans facing reset will be faced with default.
As I visited communities in Michigan and Ohio last week, it became apparent that this crisis hits whites and blacks, the irresponsible and the responsible alike. Speculators who were buying simply to flip the property are getting burned, as they should. But at the same time, many young families are faced with losing the home that they scrimped to purchase.
Normally, if a family that had made payments and had a job got in trouble with a loan, the neighborhood bank would work it out. They'd extend the loan, keep the payments affordable, perhaps take a bit of the loss to avoid the catastrophic costs of foreclosure. But the current ''servicers'' of loans have no money at risk. They make fees off of foreclosures. Credit agencies report that they've modified less than 1 percent of loans in trouble since 2007.
The Treasury and the Federal Reserve have focused on restoring confidence in the banks, but it's time for someone to stand up for the homeowners and neighborhoods at risk.
A mechanism is needed to modify the loans headed into default. Some, where the buyers were just speculating or had no income, need to be foreclosed. But most, where the family has made payments until the interest rate soared, need to be restructured. Sustain the original rate for a longer period. Keep homes occupied and neighborhoods healthy.
Who pays? Surely the investors who profited by inflating the bubble must bear losses when it bursts. Restructured loans would cost less than foreclosure in any case. And help neighbors and communities avoid the financial crisis that is ravaging our country.
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