Troubled Homeowners Need Breathing Room

A new House bill would give borrowers and servicers more time to renegotiate mortgages so that homeowners can keep their homes, writes Tim Westrich.

An unfinished development in suburban Las Vegas awaits completion. Struggling homeowners who bought when the market was high are now stuck with resetting adjustable-rate mortgages and payments they can't afford. New legislation could help them avoid foreclosure. (AP/Isaac Brekken)
An unfinished development in suburban Las Vegas awaits completion. Struggling homeowners who bought when the market was high are now stuck with resetting adjustable-rate mortgages and payments they can't afford. New legislation could help them avoid foreclosure. (AP/Isaac Brekken)

High gas prices have stolen the spotlight of the bad economy, but we can’t forget the centerpiece of our economic downturn: a mortgage crisis that has left many Americans in foreclosure or in danger of foreclosure. Many of the highest-risk homeowners—those with adjustable-rate mortgages or with interest-only or so-called option ARM mortgages—will face an increase in their monthly mortgage payments of 40 percent or greater once the initial “teaser rates” on their mortgages expire.

Interest rates on adjustable-rate mortgages reset based on published money market indexes, usually the London Interbank Offer rate, or LIBOR; rates are calculated by adding a margin value—averaging roughly 6 percent—to the published index. That’s why one in five subprime mortgages made in 2005-06 is projected to end in foreclosure, according to the Center for Responsible Lending. And the problem isn’t limited to those homeowners who took out dodgy subprime loans—their neighbors are suffering, too. Research by the Woodstock Institute found that a foreclosure lowers the price of other nearby single-family homes by 0.9 percent on average.

Many at-risk homeowners could stay in their homes with a loan modification—a long-term change to the terms of the loan. Unfortunately, many simply don’t have enough time to negotiate a modification before servicers proceed to foreclosure. And it is widely acknowledged that servicers currently lack the capacity to handle the volume of requests for modifications. Lenders therefore often end up proceeding to foreclosure even when it is not in their economic interest to do so.

Foreclosure proceedings can be costly for servicers, who stand to lose significantly when trying to sell foreclosed properties into already glutted real estate markets. That’s why the Home Retention and Economic Stabilization Act (H.R. 6076), introduced by Rep. Doris Matsui (D-CA), is a crucial tool in the package of solutions needed to get homeowners back above water and prevent costly foreclosures.

The goal of the Home Retention and Economic Stabilization Act is simple: It would give homeowners the right to defer foreclosure of their property for up to nine months on certain adjustable-rate mortgages, given that the borrower meets certain criteria and feels they have not received proper assistance or adequate time to renegotiate their mortgage.

During this deferment period, the homeowner must continue to make payments, but is given ample time to negotiate a loan modification or similar workout plan with the servicer of the mortgage. This interim step can give homeowners some much-needed time while Congress finalizes a long-term plan. Already, the House has passed a bill that would allow the FHA to refinance troubled mortgages en masse. Despite a veto threat, the bill passed by a wide margin. The Senate may soon follow suit on a similar plan.

The criteria for eligibility are tailored to give relief to the homeowners who need it most: the mortgage must be for principal residents, not investor-owned properties; borrowers must fit into a specific income cap; and the two parties must work in good faith for a beneficial outcome. This bill has been introduced amid stories that many homeowners are contacting their loan servicers to try to get a loan modification, but servicers are so overwhelmed dealing with requests that they aren’t able to get back in touch with the borrower for months.

In addition to the deferment provision, the Matsui bill has two other critical pieces. It would require the holder or servicer of the mortgage to inform homeowners 120 days before any rate adjustment or reset to their mortgage, a notification that could help a borrower prepare for a sudden increase in the amount of their payment. And it would increase funding for housing counseling in states and cities that are experiencing the worst of the crisis.

Rep. Matsui’s bill has already gained support from consumer groups as well as civil rights organizations and labor unions.

So while negotiations on a long-term fix continue, this step could give homeowners the breathing room to make necessary changes to avoid foreclosure and to stay in their homes. The situation couldn’t be more urgent: Experts anticipate 2 million homes will be lost to foreclosure by the end of next year. Moreover, 55 million homeowners live in metropolitan areas with declining house prices, adjusting for inflation.

With the value of so many Americans’ homes on the line—and the attendant municipal costs, blight, and crime that come with foreclosures—Congress needs to act soon.

To read CAP’s legislative proposals and policy analysis on the housing crisis, please go to the Housing page of our website.

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