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Would Bailout Help with Foreclosures?

As Congress ponders possible reconsideration of the Paulson bailout package, local housing experts say it would have limited impact on the growing foreclosure crisis.

“I don’t know if it would make a huge dent on foreclosures,” said Geoff Smith, vice president of the Woodstock Institute. “It might have some impact.”

“It’s not the type of plan we would have proposed,” he said. “It’s a bailout that’s geared toward Wall Street and if it helps homeowners, so much the better.”

In the version voted down Monday, Congress added language allowing the Secretary of the Treasury to modify mortgages acquired in the course of the bailout. But buying up investments in mortgage-backed securities doesn’t mean the government will hold a controlling portion needed to enable it to offer loan modifications.

“A key facet of this crisis is the incredible complexity of these instruments,” and that means the government’s “ability to modify loans may be limited,” Smith said.

The language of the legislation left a great deal of discretion to the Treasury secretary, said Bob Palmer of Housing Action Illinois. A lot would depend on rules to be promulgated by the Treasury secretary, he said.

“If the idea is to stabilize markets, but homes continue to be foreclosed on, that’s going to reduce the larger faith in markets as well,” Palmer said.

A recent study by the Pew Charitable Trusts points out that 26 percent of all home loans made in 2005 and 2006 were subprime (29 percent in Illinois) and projects that 1 in 33 homeowners will face foreclosure as a result of high-cost loans over the next two years, with 61 percent of homeowners expected to feel the ripple effects of foreclosures, including reduced home values.

In Illinois, the state and local tax base is expected to lose $27.3 billion as a result of foreclosures over the next two years, according to the study.

Woodstock has advocated a federal program to buy up and modify troubled mortgages, Smith said. He said the financial costs of the Paulson package, if enacted, would make such a program unlikely.

A cost-free proposal would allow bankruptcy courts to modify mortgages for primary residences, as they now can for vacation homes and yachts. That would help homeowners who end up in bankruptcy and would also create an strong incentive for loan services to modify mortgages, Smith said.

“At this point that would have the most impact,” he said.

He said many modifications now being offered by mortgage services are short-term fixes and not sustainable in the long term. Many of these are headed for trouble, he said.

“When this portion of the Bankruptcy Code was written, mortgages were the most stable kind of debt,” he said. Lenders required big down payments and banks often held the loans instead of selling them off. But with incomes stagnating and the housing bubble encouraging homeowners to use home loans to cover expenses, “it’s now the most insecure kind of debt.”

But financial industry opposition to such a fix seems overwhelming, he said.

Woodstock has also emphasized the need for regulatory reform. In a statement the organization noted: “Although this is a long term proposition, it is key that safety and soundness standards, community reinvestment obligations, and consumer protections be expanded to include non-depository financial institutions who were the core cause of the current financial crisis.”

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Category: banks & credit, economy, foreclosures

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