Lawmakers and regulators having problems helping foreclosed homeowners

Posted on November 6th, 2007 by saman

Lawmakers and regulators are not getting too far with their efforts to provide relief for foreclosed homeowners. This is true because most mortgage loans that were made during the 2005-2006 housing boom are beyond salvation. It would take nothing short of a total bailout to provide any relief and that doesn’t appear to be in the horizon at this point in time.

The hard facts, unpleasant as they are, don’t give congress, the White House or banking regulators any practical ability to stop defaults and foreclosures. They candidly admit that most high-risk loans made near the end of the boom in housing went to consumers who just shouldn’t be in them. They also know that many of the homeowners were helped into financial trouble by brokers and lenders who falsely inflated home assessments and borrower qualifications in order to make the risky loans happen.

Despite dire predictions of housing values that will keep plummeting and the possibility of the meltdown resulting in a full-blown recession, it appears most efforts to help will be local and limited primarily to advice and counseling. Nevertheless, consumer and community groups continue to insist that firm action to provide relief is necessary to stop the economy’s downward spiral. Former Federal Reserve Chairman Alan Greenspan has said that the housing downturn is actually more severe than initially anticipated and that the chances of a national recession sometime next year are about 50-50.

One expert, Sheila Blair, Chairman of the FDIC thinks that mortgage servicers should provide large numbers of conversions from adjustable rate mortgages (ARMs) to fixed-rate loans to people who are not behind in their payments now, but face ARM interest resettings next year. Others, including some bankruptcy judges, believe that they should be allowed to modify loans to prevent borrowers from being foreclosed and losing their homes. Critics argue that this would likely result in keeping mortgage lenders out of the market and therefore result in even more bankruptcies. Last but not least, some Democrats have suggested that Fannie Mae and Freddie Mac be permitted to grow their mortgage portfolios and thus create the vital financial flexibility for lenders and investors to aid borrowers in refinancing. Republicans say that they won’t do that unless government-sponsored mortgage lenders receive additional oversight following multi-billion dollar accounting irregularities that have recently come to light.

Meanwhile, the debate goes on with both sides embroiled in political considerations with the pending national election. Not suprisingly, there are many key politicians and financial experts who believe that the best thing to do is nothing. They think that in the end, the housing market will recover to a more sensible price level, more prospective homebuyers will have to be credit worthy to obtain conventional fixed-rate loans and that the entire situation will seek its own level. Even if this is true, it does nothing to address the tens of thousands whose American Dream has gone up in smoke, nor to prevent the billions of dollars that will be lost in the national economy.