Mike Calhoun
President, Center for Responsible LendingSeptember 22, 2008
The government plan announced by Treasury Secretary Paulson and Fed Chairman Bernanke fails to deal with the root cause of the crisis -- families in foreclosure -- and instead is purely and simply a bailout of the lenders who created this disaster. The bailout will not solve our economic problems because it will do virtually nothing to stop the foreclosure epidemic. Continuing foreclosures will drag down the economy even further.
A truly comprehensive plan must also benefit ordinary, hard-working Americans, the ones who already are bearing the brunt of Wall Street's excesses.
By forcing taxpayers to buy abusive and reckless loans from irresponsible lenders, taxpayers are funding a multi-billion dollar subsidy to private corporations. Yet the millions of families who have been unfairly pushed to the financial brink by these mortgages get nothing.
Don't let anyone tell you the government will be able to prevent foreclosures by buying this troubled debt. Wrong. Bailing out financial institutions is NOT the same thing as providing relief to foreclosure-plagued American families.
A plan that addresses root causes must:
Lift the ban on judicial loan modifications. Voluntary loan modifications are not working, as the as mounting crisis attests.
Here's our analysis of why this newest bailout plan for industry won't allow for the large-scale foreclosure prevention:
Taxpayers' Forced Ownership of Troubled Mortgage Securities Won't Curtail Foreclosure Wave at the Root of Economy's Woes
Allowing the Federal government to purchase illiquid mortgage-backed securities (MBS) has been presented as a comprehensive solution to the economic crisis, but it has a serious flaw. This plan will NOT increase loan modifications that prevent foreclosures.
Existing Legal Contracts Constrain Modifications: Under the U.S. Constitution, the government cannot unilaterally modify existing contracts and legal agreements that dictate the treatment of loans that have been securitized.
- Agreements often explicitly limit the number of loans that may be modified to 5% of the loan pool;
- Other investors may sue to prevent modification of the loans; and
- Too often modifications made under these agreements are those least likely to lead to a sustainable mortgage.
Loan servicers will continue to be overwhelmed. Loan servicers will not change, and they will continue to be overwhelmed by requests for loan modifications and assistance. These servicer’s are under-resourced and have net incentives that tend to steer them away from making modifications.
Homeowners still have no escape routes to avoid foreclosure. With home prices in virtual free fall, refinance options eliminated for many, and higher adjustable-rate mortgage payments still ahead, home losses will continue to rise, which in turn will continue to exert downward pressure on home prices.
This article was abridged for quick readability.
