Lawmakers were still wrangling Thursday night about the Bush administration’s $700 billion bailout of the financial system. Political theater was mainly responsible for the delay, but it will be worth the wait if lawmakers take the time to make sure that the plan includes real relief for homeowners and not only for Wall Street.
The problems in the financial system have their roots in the housing bust, as do the problems of America’s homeowners. Millions face foreclosure, and millions more are watching their equity being wiped out as foreclosures provoke price declines.
The problems became even more evident Thursday night with the federal seizure and sale of Washington Mutual to JPMorgan Chase.
It’s unacceptable that lawmakers have yet to come out squarely in favor of bold homeowner relief in the bailout bill. Treasury Secretary Henry Paulson, the biggest advocate of bailing out Wall Street, is also a big roadblock to helping hard-pressed borrowers. He wants to keep relying on the mortgage industry to voluntarily rework troubled loans, even though that approach has failed to stem the foreclosure tide — and does a disservice to the taxpayers whose money he would put at risk in the bailout.
Many of the assets that Mr. Paulson wants to buy with the $700 billion have gone sour because they are tied to mortgages that have defaulted or are at risk of default. Unless homeowners get some help — and its a pittance compared to what Mr. Paulson wants to give to bankers — the downward spiral of defaults, foreclosures and tumbling home prices will continue, which could push down the value of those assets even further.
We could make a strong moral argument that the government has a greater responsibility to help homeowners than it does to bail out Wall Street. But we don’t have to. Basic economics argues for a robust plan to stanch foreclosures and thereby protect the taxpayers’ $700 billion investment.
Mr. Paulson has long opposed what is probably the best way to help Americans stay in their homes: allowing a bankruptcy court to reduce the size of bankrupt borrowers’ mortgages. Unfortunately, but predictably, drafts of the bailout plan circulated late Thursday do not mention that relief.
It is simply outrageous that every type of secured debt — except the mortgage on a primary home — can be reworked in bankruptcy court. The law was designed to protect lenders, who have obviously and disastrously abused that protection. There would be no favors dispensed in bankruptcy proceedings. Lenders would have to accept less of a payback and borrowers would have to submit to the oversight of the bankruptcy court for years.
But the bankruptcy process would mean many fewer foreclosures. And that would halt the downward slide in home prices, reduce the number of vacant homes — and the blight that comes with them — and help preserve equity for all homeowners. It would cost the taxpayer nothing.
Arguments against bankruptcy relief for mortgages have all been raised and refuted in Congressional hearings and debates over the past year.
There should be no more balking. Any bailout bill must allow struggling homeowners to modify their mortgages in bankruptcy court. Mr. Paulson should drop his opposition now. If he won’t, Congress should insist on the bailout for homeowners. Americans’ $700 billion investment needs to be protected.
* Editorial New York Times, (September 26, 2008)