Loan Modification Frustrations & Foreclosures Have Become a Travesty for Economic Recovery
Oregon’s Senator Jeff Merkley said recently: “Nearly three years after an economic collapse caused by the actions of Wall Street, the big financial firms are back on their feet – but homeowners are not. Falling home prices are wiping out the investments made by American families, hurting our economy and triggering another wave of foreclosures. We must act now to stem this tide and keep families in their homes.
“We need to take action now to put housing at the top of our national agenda. That includes a much improved mortgage modification system and common sense foreclosure intervention including third party mediation and a national short refinance program. It doesn’t make sense to force families into foreclosures that further drive down prices.”
Over 300,000 foreclosures have been filed against American families each month for the past 20 months. In the past year, nearly 28,000 Oregon families have been served with foreclosure filings. The financial impact of this reality is hurting millions of homeowners… but the free-falling housing prices are also taking an unparalleled toll on small businesses.
According to the Cleveland Federal Reserve, approximately 16 percent of all U.S. small business owners have pulled equity from their primary residences to grow and maintain their small business. In the United States, there is an inextricable link between small business ownership and the use of home equity as a line of credit.
The Federal Reserve’s Survey of Consumer Finances indicates that between 1998 and 2007, small business-owning households “took on larger amounts of home equity debt faster than households headed by someone employed by others.”
Merkley is correct in his assessment that a viable economic recovery won’t happen until we help the housing market. A range of economists have concluded that repairing the housing market is critical to adding jobs and accelerating the slow recovery.
But how do we repair the housing market?
Senator Merkley is proposing a six point plan to boost the housing market and stem the tide of foreclosures.
1. Bolster the market by providing a permanent tax credit for first-time homebuyers;
2. Assist families facing foreclosure through a national “short refinance” program that would enable such homeowners to refinance their mortgages based on current interest rates and home values. Homeowners have been given confusing instructions to get a mortgage modification, only to be told months later they didn’t qualify and their home was facing foreclosure. Advised by their mortgage companies they stopped making payments on their homes and their credit has been ruined, making it even more difficult to refinance their home.
3. Stop the “dual track” that continues foreclosures while loan modifications are evaluated until it is determined that the borrower is not eligible or does not qualify for a loan modification;
4. Provide homeowners with a single point of access when they seek a loan modification to improve accountability and ensure greater clarity during the process;
5. Establish a third-party review prior to foreclosure and fully enforce
6. Implement the “lifeline” bankruptcy option by providing bankruptcy judges with the power to modify the terms of home loans just as they can with vacation homes and yachts.
Consumer protection legislation should have been a top priority of Salem legislators. Unfortunately time is running out and it appears the only bill that will help some is Rep. Jason Conger’s Senate Bill 491, which provides protections to tenants of residential properties that are under foreclosure. The bill will help those who are truly innocent parties in foreclosure proceedings, yet suffer the greatest harm. But it does nothing to help the homeowner facing foreclosure.
With access to small business capital so heavily dependent on home equity, it’s essential that something be done about the downward trend in housing prices. It’s estimated that we’ve seen a precipitous loss of more than $16 billion in home equity credit since the housing bubble burst.
So the ball rests now in Congress where Senator Merkley and others are working on legislation to stop the practices that are forcing people who could otherwise make reasonable payments on their homes into foreclosure.
The question remains: will any of this keep housing values from falling?
The solution is notably more complicated than urging bankers to simply “lend more” or reducing the regulations that inhibit more liberal lending to small businesses and entrepreneurs. Policy makers seeking to improve the economy should pay close attention to the link between home prices and small business credit. PHA