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Housing fix?

State, Congress should be cautious in plans to shore up market

The Rocky

Published April 17, 2008 at 12:05 a.m.

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Perhaps the best thing that can be said about the American Dream Protection Act of 2008, due to be introduced in the legislature at any time, is that it's not likely to be as bad as many of its counterparts under consideration in other states - and in Congress.

Unlike those other measures, Colorado's bill addressing home foreclosures, by Rep. Mark Ferrandino, D-Denver, and Sara Gagliardi, D-Arvada, would not require substantial public subsidies. Nor would it place taxpayers on the hook for a massive bailout if the credit crunch intensifies.

That said, if the bill as filed still resembles the original descriptions, it is a bad idea and would provide little relief to delinquent homeowners.

Lawmakers should rarely allow third parties (in this case, judges) to rewrite the terms of duly negotiated contracts, which is what mortgages are. The justification is usually that a lender hasn't made a good-faith effort to renegotiate while the homeowner has attempted to catch up on delinquent payments. But deciding what constitutes "good faith" is not an easy task.

Under current law, foreclosure is hardly a speedy process. It can easily take seven or eight months. Before a lender can file a foreclosure proceeding, a mortgage payment has to be at least 90 days late. The sale of the home must take place between 110 and 125 days after filing. Up to the date of the sale, the homeowner can "cure" the default and halt the foreclosure by catching up on delinquent payments and paying any back interest, late charges and the legal fees of the lender.

Ironically, any moratorium on a foreclosure may be just as likely to aggravate a particular problem as solve it. That's because mortgage payments, interest penalties and late fees would continue to pile up - and the borrower would be responsible for those as well as the payments from the original period of default.

In other words, unless a homeowner hits the lottery, the delay would actually increase his indebtedness.

If such a bill is passed in Colorado, lenders will no doubt increase everyone's cost of obtaining a mortgage. Mortgage companies would require larger down payments, charge higher interest rates or both.

Banks have a huge incentive to renegotiate lending terms and avoid foreclosure whenever possible. For one thing, a lender typically collects no payments on a foreclosed property until it is eventually sold. And there's no guarantee a foreclosed property will sell for full market value, so the lender can lose on that transaction as well.

Not that Congress is acquitting itself well on the housing front. The Senate has passed its housing bailout bill; the House is about to; and the White House has agreed to go along.

The Senate bill, likely to be the template for the final bill, is terribly unfair, perhaps inevitably so. For a start, why are people whose homes are in, or in danger of, foreclosure now entitled to help unavailable to people who lost their homes in less agitated times? Also left on the outside are homeowners who have struggled successfully to stay current on their mortgages and lenders who were careful about whom they lent to.

The Senate bill has $25 billion in tax breaks for lenders and homebuilders. The Senate gives a $7,000 tax break to the buyer of a foreclosed house, giving the bank that's selling it an advantage over the seller next door who just wants to move.

The House would give a tax credit of up to $7,500, repayable over 15 years, to first-time homebuyers. Is it really good policy to entice these buyers into a market that's still falling?

One source of the current housing mess is houses whose value fell below the amount still due on the mortgage. So the biggest piece of the final package is likely to be $300 billion for the Federal Housing Administration to underwrite refinanced mortgages. The danger is that the taxpayers might find themselves on the hook for the loan companies' worst performing loans.

Since some sort of major housing bill is inevitable in the current environment, we can only hope that it has the desired effect of stabilizing the market. But of course when the market does stabilize, as it must, we'll never actually know whether it would have happened just as quickly if Congress had stayed on the sidelines.

Comments

  • April 17, 2008

    6:42 a.m.

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    VVVV writes:

    Another perfect example of the idiocy of politicians' thinking. They want to reduce foreclosures, so they create an incentive for banks to sell houses in foreclosure by giving tax breaks to the buyers. I swear the only thing they are good for is pouring grease on a downhill slide.

  • April 17, 2008

    9:08 a.m.

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    davis_x_machina writes:

    Nice unsourced graph there bigfoot. Once we get rid of the cancer we'll all have superb health, eh? I don't know about anyone else , but I'd feel lots better if I knew who produced that graph and where they derived their data.

  • April 17, 2008

    2:56 p.m.

    Suggest removal

    oceanview78382 writes:

    SASQUATCH - thanks for the informative numbers. You might not be taking into account that the re-set date on a mortgage that it could takes months more for borrowers to default.

    I do think the Colorado housing market will eventually come back, however predictions of when are almost always too early. 2011 might be a good guess.