Bailout No Quick Fix, Skips Strapped Homeowners, Advocates Say

RISMEDIA, Oct. 7, 2008-(MCT)-The $700-billion financial industry bailout that became law Friday could make a recession shallower, and potentially even shorter, but it won’t stop the economic and housing downturns in their tracks, according to economists and other experts.

And homeowners, consumers and job seekers who are in financial trouble won’t see a quick fix to their own problems, either, the experts said.

The economic package, which President George W. Bush signed into law less than two hours after the U.S. House of Representatives passed it, authorizes the federal government to buy billions of dollars in bad mortgages and other debt, taking the troubled loans off the books of financial firms.

Supporters say the taxpayer-funded bailout will free up credit markets and allow banks to lend again. Eventually, they hope, the government will resell the assets.

The bill’s passage and signing came five days after the House rejected the bailout, leading to a week of financial market turmoil. Since then, the bill was sweetened with $110 billion in tax breaks and added spending and an increase in deposit insurance limits.

The bailout also contains provisions to help stem the foreclosure crisis, a critical step before the housing market-and perhaps the nation’s economy as a whole-can rebound. But foreclosure experts say neither the bailout nor programs already in existence will do enough, and they urge a completely different approach to helping those at risk of losing their homes.

“We still don’t see enough specifics in this bill to be sure neighborhoods will benefit from this instead of Wall Street,” said Alan Fisher, executive director of the California Reinvestment Coalition, a group of community-based organizations that lately has focused on preventing foreclosures. “Why not say, ‘Stop right now, don’t foreclose on any more people, let’s find a way to solve these problems.’ ”

Foreclosed houses typically drive down neighborhood property values, making it more likely that owners of nearby homes will end up owing more on their mortgages than their homes are worth. Some of those people will stop making mortgage and property tax payments, continuing the downward spiral.
For the nation’s economy, the importance of stopping the spiral is “enormous,” said Tim Canova, professor of international economic law at the Chapman University School of Law, in Orange, California. “If you don’t take care of the bottom of the pyramid, it’ll be like quicksand, pulling down the top.”

The Emergency Economic Stabilization Act approved by Congress last week and signed by President Bush on Friday contains broad language requiring the Treasury Department to develop a plan to “mitigate” foreclosures. It also requires federal agencies to encourage mortgage companies to modify the loans of borrowers in danger of foreclosure.

That step comes on top of the Housing and Economic Recovery Act, passed by Congress in July, which created the Hope for Homeowners program, a government-insured refinancing option for strapped homeowners whose homes are worth less than they owe their lenders. The July legislation also included a tax credit for first-time home buyers, and money for governments to implement foreclosure-mitigation efforts of their own.

But these moves have not convinced critics that enough is being done to prevent foreclosures.

About two weeks ago, Fisher’s organization sent a letter to congressional leaders, imploring them, “Do not spend $700 billion on the wrong people.” Instead, the group urged Congress to impose a six-month freeze on new foreclosures and reform the bankruptcy code to allow more people to avoid foreclosure.

They are not alone.

San Jose bankruptcy attorney Ike Shulman, who is also the legislative chair for the National Association of Consumer Bankruptcy Attorneys, also urged changes to bankruptcy law, arguing that judges should be allowed to reduce the amount of debt bankruptcy filers owe on mortgages for their primary residences.

“Whatever arrangement the (bailout) bill makes for the Treasury to buy or take over servicing the loans, it does not empower the agency to do a restructuring that would reduce the amount on the loan,” he said. Instead, the government will encourage mortgage companies on a voluntary basis to either modify loans for borrowers in danger of foreclosure, or refinance their loans under the Hope for Homeowners plan.

Bankruptcy court judges already have the power to reduce debts owed on vacation homes, cars or boats, and structure repayment plans based on the lower amount. Shulman said allowing the same treatment for mortgages on primary residences would help many people avoid foreclosure.

“All the noise that’s being made about ‘They want to help homeowners,’ and they missed the best opportunity to do so,” Shulman said, referring to Congress. A provision echoing the bankruptcy attorneys’ proposal failed to make it into the final version of the bailout bill, despite the support of many legislators.

A spokesman for the Federal Housing Administration said it was too early to assess whether the bailout would help the housing market.

But the Help for Homeowners program, which went into effect Wednesday, should help as many as 400,000 “underwater” homeowners, said Bill Glavin, special assistant to the FHA commissioner. Under the program, some borrowers who owe more on their mortgages than their homes are now worth can refinance, with their lenders’ cooperation, into smaller loans, helping many homeowners avoid foreclosure, Glavin said.

What’s more, even as the bill passed, the U.S. Labor Department announced the nation lost 159,000 jobs in September, and an increasing number of economists suggested the nation might already be in recession, or is likely headed that way-bailout or no bailout.

“It can’t keep us from having a recession; it’ll just keep it from becoming much worse,” University of Maryland business professor Peter Morici said.

And investors weren’t calmed by the bailout, as the Dow Jones industrial average dropped 157 points Friday.

“Everything was a wild swing,” said trader Bob McConnell, of Brooklyn, after the market closed Friday, who suggested the bailout wouldn’t work right away. “Every day will be a surprise.”

Even if the bailout gives consumers a bit of psychological relief, that won’t translate into new spending or even more confidence, experts said.

The Treasury Department is going to hire asset management firms, along with lawyers, bankers and others. It won’t be easy to value the troubled mortgages, but experts said an announcement of auctions and pricing plans could come within a few weeks.

As that happens, credit should begin to loosen a bit, economists said. As banks lend to each other again, they’ll also open their purse-strings to other businesses, and, eventually, to consumers seeking mortgages and car loans. Lenders may also be able to help homeowners in foreclosure, experts said.

“It provides confidence that a lot of these companies having real issues are going to be around tomorrow and the next day and next week and next month and next year,” added economist Joel Naroff, who heads Naroff Economic Advisors in Pennsylvania. “But it’s going to take a while for the financial institutions to get healthy again and while this is going to help, it doesn’t mean conditions are going to turn on a dime.”

What’s more, the bailout cannot solve the housing market’s broader troubles-or, for that matter, the economic downturn, said New York University economics professor Lawrence White.

“I think unfortunately we’ve still got a little more of a distance to go in housing,” said White, who suggested the bottom could come by late spring. White noted that other sectors, such as commercial real estate and credit card lending, could still see their own trouble, too.

Nonetheless, experts universally agreed that the bailout was necessary to at least start the process of finding the bottom-and a way out.

“This isn’t a quick fix and it doesn’t make us whole,” said Jonathan Miller, an appraiser with Miller Samuel in Manhattan. “What it does do is start moving the glacier in the right direction.”