Rescuing Homeowners…And The Economy

Eighty-one percent of Americans believe the United States has “seriously gotten off on the wrong track,” according to a new New York Times/CBS poll. Only 21 percent say the overall economy is good condition, “the lowest such number since late 1992.” To rehabilitate the economy, lawmakers are now confronting the urgent need to address the deep mortgage crisis. Subprime lenders recklessly sold risky loans to vulnerable Americans, and 30 percent of subprime borrowers now owe more on their mortgages than their home is actually worth. Housing officials estimate that 8,000 homes are being foreclosed every day, with at least two million more expected over the next two years. Astoundingly, this leaves 43 percent of recent subprime loans ending in foreclosure with an additional 40 million neighboring homes seeing their property value decline as a result. Contrary to the White House spin this week, the crises Main Street and Wall Street are due to years of conservatives’ efforts to water down regulatory structures. This week, the Senate went to work to solve this mess. In a bipartisan agreement reached on Wednesday, Senate leaders recognized the urgent need to assist homeowners who have been caught in the middle of the mortgage turmoil and the sudden, rapid downturn of the housing market. The Foreclosure Prevention Act is a first pass by Congress to provide refinancing options, tax credits and counseling to struggling homeowners. “Obviously for millions of people on Main Street who wondered whether or not the Congress is paying attention to their concerns, what’s happened to their homes, to their economic well being, this effort that we have put into the last several days, I think, is a major step in the right direction to offering some real hope to people on Main Street,” said Senate Banking Committee Chairman Chris Dodd (D-CT).

THE GOOD: The bipartisan legislation, S. 2636, is a good first step, though more is needed to fully address the magnitude of the crisis. “This package addresses the core issues of this crisis, including foreclosure mitigation, mortgage counseling, FHA modernization and homeowner tax credits, among other provisions,” said Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) in a joint statement. The list of provisions in the compromised version of the bill include $4 billion in Community Development Block Grant funding to rehabilitate and buy foreclosed properties, $100 million in foreclosure prevention counseling, a $10 billion expansion of tax-exempt bond authority for states to help with refinancing subprime mortgages, and a standard property tax deduction valued up to $1,000. These provisions could be bolstered, however, to offer more support to homeowners. This deduction will give much-needed assistance to the 28.3 million people who do not itemize on their federal income tax returns. Additionally, the bill would expand the role of the Federal Housing Authority, a government agency that insures mortgages, by raising the limit on the size of mortgages it can back. “We helped Wall Street. … But now is our opportunity to take care of people on Main Street,” said Reid.

THE BAD: Unfortunately, the Foreclosure Prevention Act has downfalls. One of the major add-ons to the bill was a “carryback” provision on net operating loss (NOL) for businesses. A company experiences a NOL when its annual expenses exceed its income in a given tax year. Under current law, companies can use NOLs to offset the taxes they owe on profits made in the two previous years. The Senate housing bill would extend the “carryback” period to four years from two. Although some of the corporations who were hit by the Wall Street market meltdown were innocent bystanders, some of the largest losses are on the books of the wealthiest financial players — the same people who stand to gain from this clause. The housing rescue bill “started off in a very good place for consumers, average Americans,” said Andrew Jakabovics, the Associate Director for the Economic Mobility Program at the Center for American Progress. “But it turned into something that was targeted at a narrow sector of the economy. … The net operating loss provision is basically a handout to the building groups.” The NOL stipulation is not the only that damages the American middle class. On Thursday afternoon, the Senate rejected its first and most contentious amendment to the bill, a proposal by Sen. Dick Durbin (D-IL) to allow bankruptcy judges to change the terms of subprime mortgages. Consumer groups see the exclusion of this provision as the bill’s biggest setback, arguing that of all the legislative proposals aimed at helping homeowners, this was the most crucial. Absent from this legislation is any provision focusing on preventing future foreclosures and ensuring that responsible homeowners can remain in their homes. In the absence of an effective mechanism for preventing future foreclosures from overwhelming local housing inventories, Americans’ home equity and the attendant economic benefits will continue to be in severe jeopardy.

DON’T FORGET ABOUT HOMEOWNERS: Billed as boosting the slumping housing market, the Foreclosure Prevention Act actually “showers money-losing businesses with $25 billion in tax relief in the next few years but offers just $3 billion to homeowners.” “Benefits to businesses also dwarf $4 billion in the bill that would be given to cities and towns to buy and refurbish foreclosed and abandoned homes in an effort to stabilize communities and preserve neighboring home values.” Political leaders must recognize that while this crisis must be dealt with quickly, the legislation must target the communities most greatly affected by high levels of foreclosures and rising foreclosure rates. The NYT/CBS poll reveals that Americans favor “help for individuals but not for financial institutions. A clear majority said they did not want the government to lend a hand to banks, even if the measures would help limit the depth of a recession.”

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Ali Frick, Benjamin Armbruster, and Sarah Dale

This material was created for the Progress Report, the daily e-mail publication of the Center for American Progress Action Fund.

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