The Coming Foreclosure Tsunami

Unlike most hearings on the Hill, last week's meeting of the Joint Economic Committee actually got more interesting the longer it went on. While the first half-hour featured Federal Reserve chairman Ben Bernanke offering his modest, softly downbeat but not panicked predictions about how the unfolding subprime mess would affect the broader economy, the last hour provided an opportunity to hear committee members give their own often eccentric diagnoses and predictions.

Kansas Republican Senator Sam Brownback opined that tax cuts, shockingly, were probably the best way to deal with the current crisis. New Hampshire Republican Senator John Sununu spent much of his allotted time pointing out that he'd done a better job of predicting future trends of housing inventories in March than the chairman. "I was right," he told Bernanke with a smirk, "and you were wrong." ("Well, Senator, you were right and I was wrong," Bernanke intoned back into the mic with a deadpan expression that basically said, "Satisfied, dick?") And Senator Robert Bennett, a Republican from Utah, offered a refreshingly honest articulation of the conservative view of the unfolding debacle: "Markets make better decisions than governments do, and the market will punish, the market will reward and the market will ultimately stabilize. For the market is a just and wrathful God!" (OK, I made up that last sentence.)

But amid the grandstanding, Maryland Congressman Elijah Cummings injected some welcome perspective. "Many members of Congress now, Chairman, are holding forums in their districts, as I will be doing very shortly, to help people who are coming to our doors literally with tears in their eyes and trying to figure out how they're going to manage a foreclosure that's right around the corner.... It seems like you have painted a very rosy picture, but if you came and walked through my district, I think people would be very...surprised that you seem so calm."

Bernanke was defensive: "Congressman, first, I don't know how you got the impression that I was unconcerned about foreclosures."

"I didn't say you were unconcerned," Cummings shot back. "I just said you seem to be pretty calm about it." Foreclosures in Maryland were up more than 400 percent in the third quarter, compared with the first. Minority homeowners, like those in Cummings's inner-city Baltimore district, are getting hit particularly hard. "I know that so often what happens is that when we're making decisions in the suites, we forget about the people who actually have to go through this," Cummings said. But "we're becoming a bit alarmed."

In past financial implosions, of S&Ls in the '80s or Long Term Capital Management in the '90s, it was easy to name the villains but far trickier to find the victims. Not so here. They're everywhere, not just in inner-city Baltimore. There are subdivisions in the exurbs that are beginning to resemble ghost towns.

So what is to be done? The long-term challenge is to regulate an industry that, left to its own devices, seems to have eaten its young. Last week the Mortgage Reform and Anti Predatory Lending Act of 2007 passed out of Barney Frank's House Financial Services Committee with the support of nine Republicans. It's far from perfect, but it represents a small step in the right direction. The mortgage industry is fighting it tooth and nail.

The more immediate issue, though, is what to do about the millions of people who live in homes that are in danger of going under in the coming tidal wave of foreclosure. North Carolina Democratic Representative Brad Miller has proposed one common-sense solution. He has sponsored a bill that would allow bankruptcy judges to amend the terms of home mortgages. As the law currently stands, the terms of a mortgage on a yacht or a vacation home can be adjusted during bankruptcy, but the primary residence is off-limits. "This makes no sense," said Eric Stein of the Center for Responsible Lending in testimony before the House Judiciary Committee Subcommittee on Commercial and Administrative Law. "The current bankruptcy law deprives mostly low-wealth and middle-class families of protections available to all other debtors and grants lenders on home mortgages a special protection not available to any other type of lender."

Correcting this quirk of bankruptcy law seems like the kind of fairly straightforward modification you might want your Democratic Congress to make in the midst of a massively disruptive financial crisis. But if you've been following the Democratic Congress, you've probably already predicted that some in the caucus are circling the wagons to defend the mortgage industry. A few weeks ago, sixteen "Blue Dog" Democrats from conservative districts sent a letter to House Judiciary Committee chairman John Conyers, asking him to delay considering Miller's bill because it might undermine the provisions of the bankruptcy bill that President Bush signed into law in 2005. That bill, which made it harder for the broke and desperate to declare bankruptcy, stands as one of the most egregious examples of legislative malpractice of the last five years.

"Guns are one thing," wrote blogger Matt Stoller on OpenLeft in response to the letter, "but there is no strong grassroots movement in conservative districts on behalf of big banks. These people are simply whores for credit card companies and banking interests building profitable de facto debtors prisons."

If the Blue Dogs think that standing with lenders against borrowers makes for good politics or good policy, perhaps they should go take a walk through Representative Cummings's district.

Or, you know, their own.