Market Features

We Need a Way Out of the Housing Mess

03/09/08 - 11:34 AM EDT

Terry Savage

There's no end in sight to the woes of homeowners -- and very little help on the way.

The statistics are shocking , and grow worse by the month:

900,000 American homes are now in foreclosure -- up 71% from a year ago.

Home prices declined 8.9% on average in 2007, according to the Case Shiller Index -- but some markets recorded declines of 35% or more.

Americans' percentage of equity in their homes has fallen below 50% for the first time since 1945, according to the Federal Reserve.

U.S. consumer bankruptcy filings increased 15% in February to 76,120. They're up 37.3% from a year ago.

801,840 Americans declared bankruptcy in 2007, up nearly 40% from the previous year -- in spite of tougher new bankruptcy laws.

Americans have been financing their lifestyles -- and world economic growth -- with their credit cards and houses for the past decade. America's savings rate went negative in June 2005, and has been mostly underwater ever since.

Now the bubble has burst, along with the American dream of home ownership.

We're past the stage of blame. In a column a year ago, I pointed out that there was enough greed to go around -- from homebuyers, to mortgage brokers, to financial institutions, investment banks and rating agencies.

The question now is: What are we going to do about it?

Help for Homeowners?

In spite of all these disastrous headlines, there is still no organized system to help people deal with their mortgage woes.

Consumers are widely advised to contact their lenders before falling behind on their payments. Lenders have no choice but to institute foreclosure when a loan is more than 90 days past due. But even those who try to get help from lenders soon find it's an impossible task.

The bank or broker that originally made the mortgage tells the homeowner that the loan was sold, and suggests they call the "servicer," the company that collects their payments.

Easier said than done.

The homeowner struggles to find a real person in the voicemail limbo of "press 1 to make a payment. ..." If you do get a real person at the loan servicing company, they'll explain they can't change the terms of the loan because it belongs to an unknown "investor."

The investor -- perhaps a big global bank -- may have taken a multibillion dollar "writedown" on its balance sheet. But it still wants to get paid!

Even struggling homeowners who want to do the right thing are totally frustrated. So the statistics keep adding up.

Help Plans Don't Help

The toll-free number for mortgage help has been widely promoted. But calling the well-publicized toll-free number 888-995-HOPE just leads to another bureaucratic runaround.

The Hope Now Alliance program is run out of the offices of the financial-services industry trade group. They're the ones who facilitated the mortgage mess in the first place, and who have little incentive to facilitate any real resolution to the problem that would cause the banks to recognize even more losses.

Even the National Foundation for Credit Counseling, whose member Consumer Credit Counseling Services have the real expertise in this field, acknowledges it cannot work magic when homeowners cannot make the monthly payments on their mortgages.

Michelle Johnson is President of the Consumer Credit Counseling Services of Nevada. She reports that the median home price in the community she serves is down $75,000 -- from $332,000 just a year ago.

Even worse, 95% of the problem loans are to people who owe more than their home is worth!

Johnson says her advisors are reduced to helping people sort out how to remain in their homes until the inevitable foreclosure, advising them to start saving some of their former mortgage payments for rent when they're finally evicted.

In Chicago, Cate Williams of NFCCagency Money Management, Inc., acknowledges the dilemma: "These days counseling is really about coaching and helping people understand the best of some hard, hard choices -- preparing them for some tough decisions."

A Plan that Worked Before

Last week Federal Reserve Chairman Ben Bernanke acknowledged that even dramatic Fed interest rate cuts and a huge tax rebate program are not getting the economy back on track -- and are not helping homeowners keep their homes.

In fact, all these measures are just destroying the value of the U.S. dollar as the world recognizes we will continue to borrow.

Even staunch "free-market solution" advocates are coming to recognize that the cost to our society of these foreclosures and bankruptcies could be worse than the cost of some sort of rescue plan, backed by the government, to stem the mortgage credit disaster.

But how do we walk the line between a bailout of banks, insurance companies and investment firms on the one hand -- and, on the other hand, an undeserved bailout of free-spending home buyers who figured that if they couldn't get rich on dot-com stocks they'd surely get wealthy on the house?

That's the real problem.

Alex Pollock of the conservative American Enterprise Institute has come up with a plan that is being reflected in some bills now coming before Congress. Pollock draws on the example of the Depression-era Home Owners' Loan Corporation, which was created in 1933 to help avert foreclosures by purchasing defaulted mortgages from the banks and make new loans to homeowners.

At that time nearly half of the mortgage debt in America was in default. The program was capitalized at the equivalent of $468 billion in today's dollars. Lenders didn't get all their money back and had to settle for lower-yielding government bonds. But the program did work to stop the downward spiral of home foreclosures and values.

Surely, this suggestion must rankle a conservative thinker like Pollock.

Instead, he says: "We risk a severe overshoot on the downside, and it makes sense to avoid the needless social and financial destruction that would entail."

So far, there's something in this "bailout" proposal to offend everyone -- homeowners, investors, and even foreign central banks -- since each stands to lose something in the process.

But there is also general agreement that someone needs to stand up and lead the way out of this mess before it gets even worse. And that's the Savage Truth!