http://www.commondreams.org/archive/2008/07/29/10671/
July 29, 2008
After the Housing Bill: Time to Address Foreclosures
by Dean Baker
Last week Congress finally passed its long-debated housing bill. In
addition to securing the multimillion-dollar salaries of the top
executives of Fannie Mae and Freddie Mac, and protecting their
shareholders from facing the full consequences of their bad stock
picks, the bill also provided funds for guaranteeing new mortgages for
homeowners facing foreclosure. The bill allows lenders to bring failing
mortgages to the Federal Housing Authority (FHA), which will guarantee
a new mortgage at 85 percent of the current appraised value of the
home. The Congressional Budget Office (CBO) estimates that lenders will
bring 400,000 mortgages to the FHA over the next three years. CBO
expects that 140,000 of these mortgages will go into foreclosure a
second time, leaving a net of 260,000 homeowners who will hang onto
their homes as a result of this program.
By contrast, there are likely to be 2.5 million to 3 million
foreclosures in both 2008 and 2009. This means that the housing bill
will likely help less than five percent of the families facing
foreclosure over the next two years, leaving 95 percent of this group
out of luck.
Fortunately, there is something very simple that Congress can do if it
actually wants to help families facing foreclosure. Representative Raul
Grijalva has proposed a bill, the Saving Family Homes Act, which would
allow many of these homeowners to stay in their homes. It requires no
taxpayer dollars and no new government bureaucracy, and it can begin to
protect homeowners as soon as the bill is approved by Congress.
The bill temporarily alters the rules on foreclosures. It allows
homeowners facing foreclosure the option to stay in their home as
renters paying the fair market rent. They would be allowed to remain in
their home for up to 20 years. The bill would only apply to homes that
were purchased for less than the median price in the area. This ensures
that it only benefits those most in need of help, rather than
millionaires who made bad bets in the housing market.
There are two main benefits from this proposal. First, it will provide
housing security to millions of homeowners who would otherwise be
forced out on the street. If a family is happy with their home -- they
like the neighborhood and the schools -- they would have the option to
remain there as renters. This prevents the property from standing
vacant, which is a benefit to both their neighbors and the local
government.
The second benefit is that it is likely to lead to a situation in which
many of these families will be able to stay in their home as
homeowners. By giving homeowners the option to remain in their home as
renters, the Grijalva bill changes the calculation for lenders seeking
foreclosures. Banks will no longer have the option to use the
foreclosure process to throw families on the street and then resell the
vacant house.
Instead, banks will face the prospect of having a long-term tenant. In
general, banks are not interested in becoming landlords, so this will
not be an attractive option. Banks will of course still be able to sell
the foreclosed property, but the former homeowner would still have the
right to remain as a tenant. And a property with a tenant attached will
command a much lower price than a vacant home.
In short, the Grijalva bill makes foreclosure a much-less-attractive
option for banks. It provides them with a real incentive to try to work
out a new payment schedule with homeowners that will allow them to
remain in their homes as owners.
Since the change in rules on foreclosure is temporary and limited, it
should have only a minimal effect on lenders' willingness to make new
loans in the future. Furthermore, if it raises concerns in the future
among lenders over the risks of making loans in a bubble environment,
then this would be a further benefit of the bill.
The structure of the bill is designed so that the beneficiaries will be
overwhelmingly moderate-income families and actual homeowners. A
speculator will not benefit from the option to stay in a home as a
long-term tenant paying the fair market rent.
So, if Congress is interested in helping homeowners after its heroic
efforts on behalf of Fannie and Freddie's shareholders and management,
it can approve the Grijalva bill. It would almost certainly do more to
protect homeownership than the bill passed last week.
Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR). He is the author of "The Conservative Nanny State: How
the Wealthy Use the Government to Stay Rich and Get Richer." He also
has a blog, "Beat the Press," where he discusses the media's coverage
of economic issues.