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Help on the Way?
The Way Out?Solving the crisis has become a contentious debate. Aid that will help some borrowers refinance mortgages at lower rates should soon be in place, as well as tax credits for people who buy houses out of foreclosure. But Democrats say this is way too little. Under the most ambitious plan, from Massachusetts Democrat Barney Frank, the government would insure up to $300 billion of failing subprime loans to encourage lenders to restructure at more affordable rates.
Most Republicans, on the other hand, are reluctant to bail out borrowers who took out irresponsible loans. They emphasize that a home purchase is, as Treasury Secretary Henry Paulson put it, "a long-term investment, a place to raise a family and put down roots in the community," not a way to make a killing on quickly rising values. The Administration argues that the biggest beneficiaries of a major bailout would not be homeowners but the lenders who made risky loans. The debate over the coming months will focus on how even entirely innocent homeowners and financial institutions may be ensnared. Meanwhile, in a move with bipartisan support, the government plans to mandate improved disclosure of home-loan terms and tougher licensing for brokers.
While Washington debates the big picture, grassroots groups are stepping in with solutions. Bruce Marks, CEO of Boston's nonprofit Neighborhood Assistance Corporation of America (NACA), would like predatory lenders and investment firms held accountable: "The mortgage industry and banks like Bear Stearns paid out over $10 billion in bonuses to their executives, so why should taxpayers bail them out?" More to the point, NACA has persuaded Countrywide and Citigroup to restructure thousands of ARMs and other loans at risk of foreclosure. One reason the banks agreed: Foreclosure costs them anywhere from $40,000 to $50,000 per house in legal fees and real estate commissions and forces them to pay for upkeep on abandoned homes. The beauty of it, says Marks, who is trying to sign on other banks, is "it doesn't cost the taxpayer a cent."
In the Trenches
For struggling homeowners, will any of this come soon enough? Fernando and Keia Guia, of Las Vegas, learned in 2006 that the $1,046 minimum payments on their two ARMs hadn't even covered the interest, and they were getting $916 deeper in debt every month. At the same time, the value of their home sank by $85,000.
Countrywide, their lender, warned the Guias in January 2007 that their payments would soon double. With Fernando working two part-time jobs and with two young children, the Guias were in no position to manage that. They tried unsuccessfully to refinance and to sell. When Keia called Countrywide, an employee suggested they simply walk away and send their keys to the bank -- a scenario called jingle mail.
Just when the Guias thought they'd lose the house, NACA worked out a 5 percent loan, fixed for 28 years, with monthly $1,800 payments that include taxes and insurance. "They're going to have to tighten their budget and get some more employment," says Bruce Marks, "but they'll be building equity. This adjustment is like going from the dark of night to a sunny day."
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ON THE RISE
The number of houses in foreclosure has increased by 141% since 2005.
2005 - 532,833 2006 - 717,522 2007 - 1.3 Million
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View Points
Everyone's fingerprints are on the gun.
--Victoria Reider, Executive deputy secretary, Pennsylvania Department of Banking
We're nowhere near the bottom of this problem, and nobody knows exactly where the bottom is.
--Mortimer B. Zuckerman, Editor-in-chief, U.S. News & World Report, and real estate developer
The American dream for individuals has now become the nightmare for cities.
--James Mitchell, Jr., Charlotte, North Carolina, councilman; president of the National Black Caucus of Local Elected Officials
The hundreds of thousands of people about to be thrown out on the street want the government to stand with them. That's good for the people. That's good for the economy.
--U.S. Senator Bernie Sanders, Vermont
We must not harm our economy through solutions that, however well intentioned, further erode the foundation of the nation's housing market, hurt homeowners who are meeting their mortgage obligations, or prolong the correction.
--Brian Montgomery, Assistant Secretary, U.S. Department of Housing and Urban Development
Owning a home is not a birthright. Borrowers and lenders need to recognize that for some people, the American dream of homeownership is just that -- a dream.
--Christopher Cruise, Loan officer, amerisave.com
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