Why we can't deal rationally with the housing crisis

 Sam Smith

A striking example of establishment mythmaking can be found in the failure to deal in a rational way with the housing crisis. At a time when over two million homes are in the foreclosure pipeline, neither the media nor politicians are treating it as the crisis it is. One cause: the tendency of the media to define alternatives as limited by the opinions of those least likely to come up with good solutions, namely national politicians of either major party.

Thus, you may not be aware of some of the good ideas that have been quietly kicked out the door.

For example, there was a provision that passed the House in 2009 that would have allowed bankruptcy judges to modify mortgage terms. This could have made a major difference but Barack Obama didn’t want it and the Democratic Senate buried it.

One of the Senators who supported it, Maria Cantwell, noted that

“It’s hard for folks who are under water in their homes to continue to pay 7-10% on a $175,000 and up ARM that will readjust in a year or two. They need help today. Sometimes congress critters are so far removed from money troubles like this that they just don’t understand. They say that they feel your pain, but they are just saying that. Most of them haven’t felt those kinds of poverty pains since college. When someone finds themselves facing down foreclosure – people knocking on your door asking when and where the auction will be – they face daunting traumatic stress. They don’t know where to turn because at this point in the game, the lender has stopped trying to negotiate.”

 

Writing in the Minnesota Independent at the time, Brian Faas noted:

“What is urgently needed is for judges to be granted special temporary authority to issue new terms on these troubled mortgages.  Today, judicial authority does not include the ability to rewrite lawful contracts.  But in these difficult times, that may be the best hope for a conclusion to the foreclosure crisis.

“Here’s how it would work:  After hearing evidence from both borrower and lender, a judge would decide on new payment terms that are in their mutual best interest.  That could include changing to a fixed interest rate (4-7% has been suggested), and/or increasing the length of the loan to as much as 40 years.  Any outcome which allows a responsible borrower to stay in the home, yet still pay as much as they reasonably can afford, is good for all of us.”

And Carmen Dellutri, a bankruptcy attorney from Florida wrote:

“This legislation is being supported by twenty three State Attorney Generals. Likewise, AARP has made this one of their top priorities for 2009…

“As a consumer bankruptcy attorney, I speak with people on a daily basis who are sick and tired of calling the mortgage company because they are passed around until they can find someone who can help. Then, they fill out a bunch of forms only to be told: You have to be 90 days in arrears before we can help you. That is absolute trash. Where does it say that in the mortgage or promissory note.”

But the plan went down the tubes.

Back in 2008, I proposed a more dramatic policy that I still think would work: a shared equity program in which the government – federal, state or local – would buy part of the equity in troubled homes where the owners could survive with some help, and would renegotiate or take over lending the rest of the money, and then wait for the house to be sold. It would take a while but the chances are good  that in, the end, the government would break even or make a profit. At worst,  it cost less than it currently losing through its pathetic policies.

But you can’t even begin to talk about something like that because both parties are campaigning for 2012 as though the foreclosure crisis doesn’t exist. And the media is acting as these politicians define the limits of the debate.