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Helping Homeowners: Congress Takes Big Step Forward

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Only one day after returning to work from the congressional spring recess, the Senate leadership’s gambit successfully forces lawmakers on both sides of the aisle to get down to serious work today on housing legislation. Conservative members of Congress returned from their home districts more aware than ever of the cascading ramifications of the U.S. housing and credit crises on our souring economy, and so came to the table to discuss legislation that could make a real difference in people’s lives, give homeowners a second chance, and restore confidence to our credit markets.

As a result, the Senate today begins deliberation on legislation, although its precise components are still in flux. The starting points appear to be bills put forth by Senate Majority Leader Harry Reid (D-NV) and Senate Banking Committee Chairman Christopher Dodd (D- CT). Senate Minority Leader Mitch McConnel (R-KY) insists that some conservative ideas, largely based on tax incentives, should also be on the table.

The expectation is that the Senate will move swiftly on this legislation and then send it over to the House of Representatives, where a fundamentally similar companion bill proposed by House Financial Services Committee Chairman Barney Frank (D-MA), with components developed by Rep. Maxine Waters (D-CA) is being readied.

Tense legislative negotiations conducted swiftly require everyone to keep their eye on the overarching policy goals. For American homeowners and the U.S. financial markets alike, those goals must be to protect homeowners and communities they live in by preventing an uncontrolled acceleration of home foreclosures, and by restoring confidence in the credit markets. First of all, policies should aim to keep responsible homeowners in their homes where possible as a way to preclude the significant costs to families when they lose their homes, as well as increased housing inventories and depressed values that come from foreclosures.

Second, the legislation must support the acquisition and constructive reuse of foreclosed properties for affordable housing, through homeownership with viable mortgages on responsible terms, and through quality rental units, as well as the creation of other community assets. Interventions that reduce foreclosures and support homeownership and affordable rental housing will benefit homeowners, neighborhoods, communities, and financial markets.

These strategies are mutually reinforcing and must be pursued in tandem. To achieve these goals, Congress needs to make sure bipartisan compromise results not in palliatives, but in real innovative policy solutions to contain the damage caused by the mortgage crisis and to restore confidence in our credit markets. That means the language in the legislation now before the Senate will need some work.

Sen. Dodd’s proposal ensures that responsible homeowners will be able to restructure and refinance their mortgages, working with lenders and investors who hold their mortgages and the mortgage service companies that handle mortgage payments from borrowers. The restructuring and refinancing will involve the Federal Housing Administration, and ideally other conduits such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, with limited federal guarantees to facilitate the process.

This is key, for without a mechanism to bring lenders and investors to the table to restructure mortgages the marketplace for mortgages and mortgage-backed securities runs the serious risk of over-correction, destroying home values and family savings of all homeowners in the process. Without real tools to deal with the restructuring and refinancing of troubled mortgages, the wider problems in the housing and credit markets simply can’t be tackled.

In short, helping homeowners at the retail level of the mortgage marketplace helps lenders and investors in financial markets, too. The U.S. Treasury Department and the Federal Reserve last week properly recognized the dangers to world financial markets brought on by the U.S. housing crisis when it rescued Wall Street investment bank Bear Stearns Cos. alongside all its creditors, risking $29 billion of taxpayer money in the process. This fear of contagion in financial markets is now recognized by Congress in the housing markets.

Equally important, however, to homeowners who are not directly caught up in the housing crisis because of a troubled mortgage are efforts to help communities hardest hit by foreclosures fight back the tide. Senate Majority Leader Reid’s proposal now before the Senate calls for $4 billion in grants to be spent to help the most affected communities recover from the housing crisis. The money would be used to provide resources to states, localities, and housing intermediaries to buy up bank-owned properties in bulk, rehabilitate them, and offer them for sale as affordable housing.

This makes sense, but chances are high that $10 billion will be needed given the anticipated post-war record number of foreclosures expected this year, many of them in concentrated pockets. Rep. Frank’s legislation over in the House is probably more realistic on the scale of the program, although a heavy reliance on loans could hamper its efficacy.

Compromises to get these critical policy goals passed into law will probably be necessary, though more in Congress each day seem to recognize that what’s good for Wall Street is good for Main Street, and vice versa. This means both the House and Senate should take a close look at the larger ramifications of a proposal by Sen. Johnny Isakson (R-GA) to extend a $15,000 tax break over three years to individuals who purchase a home that is in foreclosure, or new homes where construction started after September 2007, or homes where existing homeowners are in default. Unless carefully targeted, the unintended consequences of this proposal may be larger than anticipated—artificially inflating local housing prices, encouraging delinquency, and rewarding speculators.

The Center for American Progress, however, is confident that the primary policy goals of the housing legislation now before the Senate and House are solid, responsible, and pragmatic. These bills incorporate key provisions from CAP’s own proposals.

The Saving America’s Family Equity, or SAFE plan, would transfer, efficiently and transparently, large numbers of existing loans from the current holders of the mortgages, stymied by their conflicting interests, to new owners who will refinance them on affordable and responsible terms as needed to avoid unnecessary foreclosures on owner-occupied homes. And our the Great American Dream Neighborhood Stabilization Fund, or GARDNS plan, would provide money to local housing authorities and non-profit organizations to buy foreclosed properties from banks and return them to productive use as affordable housing.

Taken together, with minor adjustments and other important provisions, legislation now on the table can stabilize neighborhoods and restart frozen housing markets by significantly reducing excess inventory and moderating downward pressure on home prices. That, in turn, will help resolve the global credit crisis by fixing the problems at the root of that crisis. Congress could not be moving to tackle these issues at a better time.

Andrew Jakabovics is Associate Director of the Economic Mobility Program at the Center for American Progress.

To read more on CAP’s proposals for the housing crisis, please see:

Read more from the Center for American Progress Action Fund:

An Agenda for Federal Action on the Housing Crisis (pdf)

Congress must act now to prompt the rapid refinancing or modification of at-risk mortgages to stabilize housing and credit markets (pdf)

The Great American Dream Neighborhood Stabilization (GARDNS) Plan (pdf)

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