How big is the home foreclosure problem now?

Our country is facing a foreclosure crisis that is unprecedented. Home mortgage

payments have risen dramatically in the last few years, making it impossible for more and

more homeowners to afford to keep their homes. More than 6,600 family homes are lost

to foreclosure every day. Over 8,000,000 American homes will be lost in foreclosure in

the next five years unless action is taken immediately.

This crisis has not only affected homeowners and neighborhoods across the

country, but has also placed our nation’s overall economy in its worst shape since the

Great Depression.

Exactly what caused mortgage payments to skyrocket on so many loans?

During the Bush administration’s first term, the Federal Reserve Board kept

interest rates (and therefore, the cost of money to mortgage lenders) unusually low to

encourage the homebuilding industry to drive the economy upward. In addition to low

interest rates, mortgage lenders began offering new types of higher risk mortgages that

had not previously been made widely available. These new types of loans were marketed

aggressively, with billboards and television advertising used at unprecedented levels.

As an example, many of these new loans offered very low payments that did not

even cover the monthly interest on the mortgages. These very bad loan terms were not

obvious in the fine-print of the loan papers, so homeowners did not know how bad the

loans were. As a result, by making those lower monthly payments, homeowners actually

owed increasing balances on their loans as time passed. Instead of owing the original balance of

$350,000, after two years the homeowner might owe $370,000 and not even

realize it.

In addition, the initial low interest rates were only temporary and loans provided

that the rates would jump up dramatically after a few years. Again, these loan terms were

not properly disclosed and the interest rate increases came as a shock to homeowners,

years after they had refinanced. These interest rates are unreasonably high – as high as

10% or more on first mortgages when the cost of money to mortgage lenders now is the

lowest in modern history.

Many long-time homeowners were trapped into taking these loans (not just firsttime

homeowners). Among them were senior citizens who fell victim to fast-talking

mortgage brokers who convinced them to refinance pre-existing good mortgages into

these bad mortgages so the mortgage brokers could make large commissions. Others

were homeowners who became unemployed and fell briefly behind on their payments on

good mortgages and were convinced to refinance into the bad loans.

Why is it important to slow home foreclosures?

When homes are foreclosed, more damage is done than just to the owners who

lose their homes. Because home values are based on the sale prices of surrounding

homes, foreclosures (at particularly low prices) drive down values in the neighborhood.

When several foreclosures occur in a neighborhood, this negative influence on property

values multiplies into a downward spiral that is difficult to stop. As property values dive,

local governments are being deprived of critical revenues, creating a serious problem for

school districts, fire, and police departments. The impact on local governments is being

seen today, with deficit budgets reaching historic proportions. In addition, many

neighborhoods full of foreclosed homes are being abandoned entirely, turning them into

blighted areas ripe for crime and causing other serious problems for these communities.

What can we do to stop home foreclosures?

Fortunately, there is a solution that would cost taxpayers nothing. Senate Bill 61

(S. 61), like H.R. 1106 which just passed the House, would allow homeowners in

bankruptcy who cannot afford to keep paying their very high mortgage payments to

restructure their home mortgages by reducing the loan amounts to the value of the home,

re-setting the current high rates of interest to much lower fixed rates, and re-amortizing

the loans to 30- or 40-year loans. This would provide the lenders much more return than

they would get if the home was foreclosed. Debtors often can afford mortgage payments

necessary to provide a fair rate of interest and value for their homes, but cannot afford the

grossly inflated mortgage payments that have been caused by the bizarre terms of the bad

mortgages made a few years ago.

By keeping homeowners in their homes at court-established fair market values,

the surrounding neighborhoods are protected from the worsening effects of foreclosed

and abandoned homes. By establishing realistic values and re-setting mortgage

payments, the downward spiral of home prices can be slowed and even stopped.

When values begin to rise, H.R.1106 includes a provision (likely also to be

included in S. 61) that will return to lenders a high but decreasing percentage of any

equity acquired by the homeowner in the five years following the mortgage modification.

That way, a homeowner will not be able to walk away with a windfall profit by filing a

bankruptcy and then quickly selling their home.

Why will S. 61 not cost taxpayers money?

Unlike the banks’ proposals to have the government pay them for their losses

after homes are foreclosed (for example, by guaranteeing known “underwater” loans that

are likely to be foreclosed), S. 61 does not reward at taxpayers’ expense mortgage lenders

who made risky loans without concern for the predictable consequences we see today.

Banks do not like S. 61 and are claiming that if the law is passed interest rates on

new home loans will have to go up. Nothing could be further from the truth. That

argument is just simply “made up” and has been rejected by leading economists. The

cost of money to lenders, true values of real estate, and the credit standards used by future

mortgage lenders will and should be the primary driving forces in determining future

interest rates. In fact, S. 61 will not apply to any future loans, but rather will only apply

to loans entered into before this law takes effect.

Why do the banks oppose S. 61?

The main reason banks oppose this legislation is because the setting of home

values by courts will force them to begin to correct their accounting books to reflect the

true value of the mortgages they hold. They do not want to do that. They want to

continue to pretend that these mortgages are worth the full amounts – and are holding out

for taxpayer bailouts for even greater losses down the road.

Who supports S. 61?

This solution has been endorsed by leading economists, 22 state Attorneys

General, state and local elected officials, newspaper editorial boards from around the

country, and nearly 100 leading national organizations representing seniors, consumers,

religious organizations, financial professionals, working families, and civil rights and

housing groups. This solution was mentioned often by President Obama during the

campaign and was included as a major element of his recently released housing package.

In addition, the National Association of Consumer Bankruptcy Attorneys, Inc. (a

non-profit organization) supports S. 61 and H.R.1106. NACBA is a nationwide

organization of attorneys who represent consumer debtors in bankruptcy. It was formed

in 1992, to help consumer debtor attorneys protect the rights of honest, hard-working,

financially distressed Americans in need of bankruptcy. NACBA’s member attorneys

meet every day with thousands of families who are in the midst of foreclosure or

expecting it shortly. NACBA’s members want to be able to help their clients keep their

homes on reasonable terms, which will directly benefit their larger communities, and help

turn around the overall economy of the country.

Why is action needed now?

Unfortunately, S. 61 is losing momentum in the Senate due to tremendous

opposition lobbying by the banking industry. It is time for our government to say loud

and clear to banks: “Enough is enough!”

It is critical that our Senators hear from their voters this week, or the Senate

may lose interest in passing this important bill.

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