Bailout Won't Stop Foreclosures that Push Down Everyone's Property Values, Center for Responsible Lending Says

DURHAM, N.C., Sept. 21 /PRNewswire/ - CRL President Mike Calhoun issued the following statement:

    -- The government plan announced by Treasury Secretary Paulson and Fed
       Chairman Bernanke fails to deal with the root cause of the crisis --
       families in  foreclosure -- and instead is purely and simply a bailout
       of the lenders who created this disaster. The bailout will not solve
       our economic problems because it will do virtually nothing to stop the
       foreclosure epidemic. Continuing foreclosures will drag down the
       economy even further.

    -- A truly comprehensive plan must also benefit ordinary, hard-working
       Americans, the ones who already are bearing the brunt of Wall Street's
       excesses. If it doesn't, then any new plan is more of the same -- only
       with more taxpayer money at stake.

    -- By forcing taxpayers to buy abusive and reckless loans from
       irresponsible lenders, taxpayers are funding a multi-billion dollar
       subsidy to private corporations. Yet the millions of families who have
       been unfairly pushed to the financial brink by these mortgages get
       nothing.  Only by preventing the 6.5 million foreclosures expected in
       the next few years -- and the $356 billion drop in surrounding
       property values that will result for an additional 46 million families
       -- will the economy begin to recover.

    -- Don't let anyone tell you the government will be able to prevent
       foreclosures by buying this troubled debt. Wrong. Mortgages of
       questionable value have been sold into highly-complex securities, which
       have been carved up and sold to thousands of investors around the
       world.  The government can't put these Humpty Dumpty slices back
       together again because it won't own or even control them all. Bailing
       out financial institutions is NOT the same thing as providing relief to
       foreclosure-plagued American families.  (For more details, see the
       issue brief that follows, "Taxpayers Forced Ownership.")

    -- Regulators and lawmakers must implement solutions that benefit American
       families at least as much as banks, or nothing will change. Stopping
       the flood of foreclosures and adopting common-sense protections against
       predatory lending are the only lasting solutions.

A plan that addresses root causes must:

Lift the ban on judicial loan modifications. Voluntary loan modifications are not working, as the as mounting crisis attests. Today homeowners are barred from applying for loan changes through the bankruptcy courts if the loan is on their one and only home. Bankruptcy courts provide an existing infrastructure for supervising court-ordered loan modifications and addressing the many hurdles that prevent voluntary modifications. Judicial modifications are the best solution for preventing foreclosures that will drag down the economy further. This provides a fair, targeted way to make a real impact without requiring any tax dollars.

Cap consumer loans at 36% interest. This stops abusive interest rates that push vulnerable families back even further, and it also protects responsible lenders from unfair competition from abusive payday lenders charging 400% interest. This action alone would save America's working middle class billions of dollars.

Here's our analysis of why this newest bailout plan for industry won't allow for the large-scale foreclosure prevention:

  Taxpayers' Forced Ownership of Troubled Mortgage Securities Won't Curtail
                Foreclosure Wave at the Root of Economy's Woes

Allowing the Federal government to purchase illiquid mortgage-backed securities (MBS) has been presented as a comprehensive solution to the economic crisis, but it has a serious flaw. This plan will NOT increase loan modifications that prevent foreclosures. Large-scale loan modifications- adjusting the terms of a loan to make it affordable-is the only way to prevent massive foreclosures still ahead.

Under the bailout proposal, the government would simply become one of the investors that forecloses on homes. Mortgages are divided into groups owned by hundreds of thousands of interests. The government will buy a portion of those interests, not individual loans. The same factors that have frustrated private attempts to modify loans will remain in place.

Existing Legal Contracts Constrain Modifications: Under the U.S. Constitution, the government cannot unilaterally modify existing contracts and legal agreements that dictate the treatment of loans that have been securitized.

    -- Agreements often explicitly limit the number of loans that may be
       modified to 5% of the loan pool;

    -- Other investors may sue to prevent modification of the loans; and

    -- Too often modifications made under these agreements are those least
       likely to lead to a sustainable mortgage.

Junior lien holders will refuse to stay in back of the line. Many mortgages in recent years were structured with two loans: the main mortgage, and a second (or "junior") lien loan. Second liens are the last to receive any value from a foreclosure. However, if the bigger first-lien loan is modified, the second lien leaps ahead to claim first payback from foreclosure. Because this greatly disadvantages the first loan, first loan holders often cannot modify the loan unless the junior lien-holder agrees to stay in the back of the line (called subordinating their interests). However, many junior lien-holders are blocking modifications by refusing to cooperate.

Loan servicers will continue to be overwhelmed. Loan servicers will not change, and they will continue to be overwhelmed by requests for loan modifications and assistance. These servicers are under-resourced and have net incentives that tend to steer them away from making modifications.

Homeowners still have no escape routes to avoid foreclosure. With home prices in virtual free fall, refinance options eliminated for many, and higher adjustable-rate mortgage payments still ahead, home losses will continue to rise, which in turn will continue to exert downward pressure on home prices.

Only solutions that prevent foreclosures can address the root causes of our present crisis. This crisis began with reckless subprime loans, and any effective solution must address the foreclosures caused by these loans, which are driving millions of homeowners into foreclosure, distressing families, neighborhoods and the overall financial system.

Any solution that fails to increase loan modifications in ways that accept some pain now to prevent larger pains later will ultimately fail.

CRL is a non-profit, non-partisan research and policy group. For more information on CRL, please visit our web site, www.responsiblelending.org.

Contact: Kathleen Day

             202-349-1871
             kathleen.day@responsiblelending.org