A bailout that wouldn't cost you a dime

By Liz Pulliam Weston

Congress is considering a plan that could prevent foreclosures for about half a million homeowners. The legislation, which passed the House earlier this month, would do the following:

• Allow strapped borrowers to refinance into more-affordable, federally guaranteed mortgages.

• Aid only homeowners, not investors or speculators.

• Require those homeowners to split any future home profits 50-50 with the government.

• Cost taxpayers an estimated $1.7 billion, according to the Congressional Budget Office.

That price tag isn't as hefty as it seems when compared with how much the rest of us could lose because of foreclosures. Homeowners who keep their houses, but who live in areas where foreclosures are rising, are expected to lose $356 billion in home-equity wealth in the next two years as neighborhood foreclosures whittle away at the value of their homes.

(For more details, read my column "Foreclosure nearby? It's your problem." You also need to read that column if you still think mortgage bailouts are a bad idea.)

If something isn't done soon, we risk some pretty horrific economic and quality-of-life fallout. Rising foreclosures erode property values and local economies, while vacant houses become eyesores or worse. Clearly, the foreclosure tsunami is coming, Congress needs to act, and this bill would certainly help.

An even better idea

What's frustrating is that lawmakers had a solution that could have helped even more homeowners and would have cost you, the taxpayer, exactly nothing. This free-to-you plan would have allowed bankruptcy judges to modify mortgage terms and helped as many as 600,000 homeowners avoid foreclosure.

Who talked Congress out of this solution? Why, the very lenders who got us into this mess.

The Mortgage Bankers Association claimed the measure would have raised prevailing interest rates by as much as 2 percentage points -- a claim that falls apart under scrutiny. Under current law, mortgages on vacation homes can be modified in bankruptcy court, yet the interest rates on those are virtually identical to those on primary-residence mortgages.

Lenders do charge more for loans on investment properties, which also can be modified under current law. But that reflects the fact that investors are far more likely to walk away from troubled properties than homeowners are.

The idea that the bankruptcy measure would have raised future interest rates got even more absurd when lawmakers limited the legislation's scope. Bankruptcy judges would have been able to reduce the amount owed on a home to its current fair market value, but only when:

• The borrowers couldn't afford their payments, as determined by a means test.

• The home would otherwise be lost to foreclosure.

• The loan was a subprime or nontraditional mortgage taken out between Jan. 1, 2000, and the bill's date of enactment.

In other words, the change would have had no effect on future loans or future interest rates. The only folks who stood to lose were the lenders who approved the risky loans in the first place -- and they're going to lose anyway if the mortgages aren't modified and the homes go into foreclosure.

Enough with the excuses

You'd think that lenders would see the handwriting on the wall and be willing to work with borrowers without the threat of bankruptcy court interventions. But that hasn't been the case.

Lenders are dragging their heels for a variety of reasons. They're overworked and understaffed. They're worried about being sued by investors who bought the loans. Even when they're willing, they're often blocked by the holders of second mortgages who won't give up their claims on homes' nonexistent equity. The best way to break through this logjam is by empowering bankruptcy judges to knock a few heads together.

Continued: Action needed soon

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