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Bob Moon: Democratic Senator Christopher Dodd has scheduled a committee drafting session tomorrow to work on his bill to address the housing crisis. Among other things, Dodd’s plan would increase oversight and regulation of Fannie Mae and Freddie Mac. It would also allow borrowers to exchange their troubled mortgages for more affordable loans. Commentator Robert Reich says the bill is a start but ignores some larger issues.
Robert Reich: The housing bill working its way through Congress is better than nothing, but not much. Already one in 12 American families with mortgages owes more than their house is worth. And home values continue to slide. At this rate, by next year nearly one in four families with mortgages will be under water.
That’s about 12 million homeowners. Now, some will keep paying their mortgages, but four million are already behind on their payments, and that’s likely to grow. So perhaps eight to 10 million homeowners are heading to default, either because they can’t keep up with the payments or because they figure it doesn’t make any sense to keep paying for a house worth less than what’s owed on it.
It’s a giant problem not just for people losing their homes but also for creditors who won’t be collecting on home loans, neighborhoods becoming ever more blighted by empty houses that reduce other property values, towns and cities whose property-tax revenues are plummeting, and the economy as a whole.
Now, because the home loans are wrapped up in securities that have been resold, what’s needed is a system through which owners of those securities sell them to the government. And the government then turns around and refinances the mortgages on terms that allow people to stay in their homes. Because the benefits of such refinancings extend beyond lenders and borrowers. It makes perfect sense for government to take on these risks as long as the government gets a pro rata share of the profits, if any, when the house is resold.
This is essentially the current bill in Congress, but its eligibility rules are so narrow the Congressional Budget Office predicts it will lead to no more than 500,000 refinancings out of many millions needed. And the White House doesn’t even want to go this far, now threatening a veto.
Message from earth to Washington: Wake up before the housing crisis makes the recession far worse than it already is.
Moon: Robert Reich teaches public policy at the University of California, Berkeley. His latest book is called “Supercapitalism.”