We are witnessing a staggering failure of leadership. Housing foreclosures in May were up 48 percent over last year, and rising. One in six homes is worth less than its mortgage. Homeowners have lost, according to the Federal Reserve, nearly $1 trillion in the value of their homes, for most their greatest asset by far. Housing prices are down about 14 percent since last year, with many projecting the fall will go down 25 percent. Those who came into the housing market in the last few years -- disproportionately black and Latino families -- are getting hurt the most. Yet neither Congress nor the president has acted to stem the fall.
Many families were victimized by predatory lenders. Many loans were written without lenders making any effort whatsoever to check to see if the borrower could afford the loan. After the bubble burst, the Federal Reserve acted to bail out the shadow banking system, fearful that the entire financial system might collapse. But neither the Federal Reserve nor Congress nor the president has acted to help homeowners facing the loss of their homes.
The pain spreads far beyond homeowners who got in over their heads. With foreclosures glutting the marketplace, home prices are falling generally. Many families who invested responsibly now find themselves unable to sell their homes without taking deep losses. Worse, abandoned or foreclosed homes become magnets for crime and vandalism -- and thus drive down the prices of neighboring homes dramatically.
Plummeting home values will be reflected in state and local public budgets. Cuts in teachers and police, more crowded classrooms and less safe streets are coming. Road and sewer repairs will be postponed, with collapsing bridges and sewers the result. This, too, will be reinforcing -- as more crowded schools and rising crime make communities less attractive. That's why Federal Reserve Chairman Ben Bernanke says it is vital to put a floor under housing prices if the economy is to avoid a deep recession.
Yet, neither Congress nor the president has acted. President Bush has relied largely on volunteer efforts to encourage banks to renegotiate loans. These have helped only a handful of those in trouble. The House has passed a bill that would empower the Federal Housing Authority to guarantee renegotiated loans, with lenders agreeing to take their losses and responsible borrowers provided with affordable, fixed-rate mortgages. It's a first step, but Bush has vowed to veto anything like this.
The most sensible way to help folks as a last resort is to allow bankruptcy judges to force lenders to take some of the losses, restructure the loans at a lower level and let responsible borrowers stay in their homes. The judges -- again conservative on the whole -- could sort out, case by case, who was victimized by predator lenders and reject those who tried to game the system.
But this measure is omitted from both the House and the Senate bills, and is opposed by the president and the Republicans in Congress. Why? Because the entire banking community lobbies furiously against giving the courts the power to force renegotiation of loans and keep families in their homes. Banks are worried it will set a precedent for other areas where fraud and abuse are widespread. Despite the greed and folly of the banking community that helped make this mess, their lobby still is the most powerful in Congress. The economic downturn is bad and getting worse. Doing nothing only ensures the pain of this transition will be prolonged and widely spread. It is time to act.
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