Most risky home loans stuck beyond bailout
WASHINGTON – If you want to see a Democratic or Republican congressman squirm, mention a multibillion-dollar bailout for the housing market crisis. The apparent discomfort contrasts with reality: Most risky home loans made near the end of the housing boom can’t be salvaged. The unfolding crisis in the $10.8 trillion U.S. home loan market is so widespread and so complex that many experts question whether the government can do much to fix it – especially if a bailout isn’t on the table. “Some people are just in houses that are just way out of reach for them,” said Douglas Elmendorf, a senior economics fellow at the Brookings Institution, noting that politicians do not like “explicitly appropriating funds for this.” Congress, the White House and bank regulators have little ability to prevent defaults and foreclosures, said Karen Weaver, global head of securitization research at Deutsche Bank. AD Quality Auto 360p 720p 1080p Top articles1/5READ MOREGame Center: Chargers at Kansas City Chiefs, Sunday, 10 a.m.“It’s unfortunate, but it has to play out … We need home prices to come back to reality,” she adds. Washington’s desire to help is undercut by the reality that it’s not viable to rescue homeowners or banks that made loans or investors that bought securities backed by mortgages. “I have sympathy with a lot of the borrowers, but I don’t see how you would decide which ones were worthy and which ones weren’t,” Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said this week, while announcing legislation to crack down on mortgage lending abuses. Frank and several consumer groups say lending law reform is needed to prevent mortgage abuses in the future, while Republicans say doing it now makes it harder for the housing market to recover. Rep. Patrick McHenry, R-N.C., warned at a House hearing Wednesday that Frank’s proposed bill would “push us into a housing recession” because lenders would face new restrictions on their ability to help borrowers refinance. Political pragmatists say there are so many complicated issues at hand and so many interest groups involved that only narrow proposals can muster support. For example, Alex Pollock, a resident fellow at the American Enterprise Institute, has drawn up a one-page mortgage form designed to give borrowers a much simpler way to understand the financial commitments involved in a home loan. Yet his commonsense suggestion is overshadowed by fears of what more defaults will do to the economy and financial markets. Former Federal Reserve Chairman Alan Greenspan said this week the data suggest the housing downturn is worse than anticipated. However, his analysis of housing statistics put the possibility of a recession in 2008 at 50-50. Politicians headed into a presidential election year aren’t thrilled with those odds, especially as loans made in late 2005 and 2006 with low teaser rates approach deadlines for resets to sharply higher rates. Moody’s Economy.com projects that more than 2 million mortgages worth about $450 billion will default. Even after homes are sold at foreclosure auctions, investors are still likely to be hit with nearly $150 billion in losses, according to the forecast. The defaults extend beyond subprime mortgages extended to borrowers with weak credit. They include loans made to borrowers who weren’t required to provide proof of income, borrowed more than what their home is worth or made down payments of less than 10 percent. President George W. Bush has pushed for expanded authority for the Federal Housing Administration, a Depression-era agency that insures loans made to low-income borrowers. A bill authorizing the FHA to help borrowers with larger home loans stalled in the Senate after passing the House. Many experts say its impact would be limited. Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., argues that mortgage servicing companies should agree to widespread conversions of adjustable-rate loans to fixed-rate loans for borrowers who are current on payments but confront rate resets. Experts in the $6 trillion market for mortgage-backed securities say Bair’s idea won’t work because mortgage servicing companies, which collect and distribute loan payments to lenders, have a legal responsibility to modify loans only if they’re confident the changes would be successful, says Mark Adelson, a mortgage securitization consultant. Some Democrats and consumer advocates want bankruptcy judges to be able to modify loans to keep struggling borrowers from losing their homes. Critics say the idea would keep lenders out of the mortgage market and result in more bankruptcies.160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set!