Monday March 10, 2008
 

The Case for a Housing Rescue
 

By Barney Frank
Sunday, March 9, 2008; B07
The Washington Post
 

Problems that began in the U.S. mortgage markets have led to the most serious international economic crisis since the late 1990s. Huge losses and concern about credit quality have spread far beyond the housing sector. America faces the prospect of a sharp recession, made all the likelier by the probable default of several million additional mortgages in the coming year and the resulting displacement of millions of families.

To avert a recession, or at least diminish its severity, Congress and President Bush recently collaborated to pass an economic stimulus package, and the Federal Reserve has lowered interest rates. But the unusual nature of the problems means that these measures, while necessary, are not sufficient. Determining what must be added to the policy mix requires understanding how this economic crisis is different from all others. The deterioration of credit and underwriting standards that went unchecked by regulators has weakened many financial institutions and made all of them reluctant to provide the flow of credit that is necessary to fuel economic growth.

The negative consequence of this cascade of foreclosures has turned out to be more damaging than predicted. Of course, individuals whose homes are foreclosed suffer the most, and in some cases it is a suffering to which their own irresponsibility contributed. If they were the only ones being hurt, the arguments for simply letting things take their course without intervention would be stronger.

But there are concentric circles of victims. First, the people who own homes in those neighborhoods that have a high rate of foreclosures will see their property values decline, and a spread of blight will diminish the quality of their lives. Second, communities where foreclosures cluster are hit with a double whammy -- a need for more public safety and other services to deal with the foreclosed properties as well as a drop in the tax revenue that occupied homes contribute. Third, the economy as a whole weakens as the problems spread even more widely.

With all this in mind, the House Financial Services Committee is developing legislation to limit the damage done by the record number of foreclosures in the past 12 months and to reduce the number going forward. No matter what we do, there will still be more mortgage failures in the coming year, but a substantial reduction in the expected incidence can help prevent the economic consequences from being as dire as they might otherwise be.

In concept, we propose to tell those who either originated or purchased mortgages that are now extremely unlikely to be repaid that they should write down their existing obligations to a level that represents current market value. After -- and only after -- the loss is taken, the government would facilitate refinancing mortgages for homeowners who could meet repayment obligations at the new, written-down level. Of course, not all borrowers would be able to refinance, but the number of foreclosures could still be substantially reduced. This plan would use the Federal Housing Administration's authority to guarantee certain loans to induce a renewed willingness to lend by private entities that are either unwilling or unable to do so.

Some will object that this is "bailing out" people who made mistakes.

Yes, some people borrowed imprudently. On the other hand, though, it is clear that many of the people in this situation were misled, were deceived or were in other ways the victims of unfair lending practices.

Refusing to respond to their plight would not only be lacking in compassion but would also be bad economics. Everybody -- homeowners, lenders, neighbors, indeed our entire economy -- is worse off when a foreclosure occurs instead of a prudent write-down and appropriate refinancing.

In addition, we will be proposing a program of loans and grants to help states and cities acquire foreclosed properties and facilitate returning them to the tax rolls as owner-occupied or rental units.

Taken together, these initiatives will help meet three crucial objectives. First, they will allow millions of families to avoid the disaster of losing their homes. Second, they will help hard-pressed local jurisdictions avoid the cascade of deteriorating neighborhoods and abandoned homes that follow in the wake of large-scale foreclosures. Finally, they will help stem the steep and destabilizing decline in house prices that led to and is intensifying the financial crisis. We cannot allow this crisis to continue unabated.

 

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