Foreclosure Victims Should Get Help, Institute Says

Written by Posted On Wednesday, 07 November 2007 16:00

Foreclosure rates continue to increase nationwide, with California, Nevada, Florida and Arizona still leading the rest of the country with home loans that have soured since the housing market began its slowdown almost 18 months ago.

In response, federal and state officials have proposed laws that would regulate the lending industry more tightly than in the recent past, to put a stop to underwriting practices that many in the housing industry have criticized as abusive or predatory.

Among the recommendations now being proposed in Congress, for example, are rules that would stop mortgage brokers from steering people into subprime loans if they qualified for less-expensive, conventional mortgages; prohibiting hidden brokerage fees that are rolled into higher interest rates, and getting rid of prepayment penalties that made it difficult for people to refinance.

Many in the housing industry, however, acknowledge that these measures are coming too late to help the hundreds of thousands of homeowners facing foreclosure already.

Paul Weinstein Jr., the chief operating officer of the Progressive Policy Institute in Washington, serves on the faculty at the Johns Hopkins University. Weinstein is a former senior White House policy adviser who has worked on banking and housing issues for 20 years.

He has proposed a three-point plan to help those who have already lost their homes because they have defaulted on their loans as well as to assist homeowners who are in danger of foreclosure.

The first is to expand the First-Time Homebuyers Tax Credit beyond the District of Columbia, and allow those who have been victims of foreclosure to use the credit to purchase new homes.

Like many cities, Washington struggled to create an environment that would attract and retain middle-income families. One way to entice people to return to the inner city was to provide more affordable housing opportunities. It was this rationale that led to the first-time home buyers’ tax credit, Weinstein said.

According to a Fannie Mae Foundation study, among program participants, first-time buyers represented 67 percent of all District homeowners between 1997 and 2005, compared with the national first-time homebuyer average of 40 percent and the central-city average of 51 percent for the same period.

The amount of the tax credit depends on the buyer's income. A single taxpayer with modified adjusted gross income of less than $70,000 is eligible for the entire $5,000 tax credit. The credit phases out between $70,000 and $90,000 in modified adjusted gross income.

Expanding the program to 10 cities would cost about estimated $450 million over the next five years. If policymakers wanted to expand the program further, they could reduce the credit to $2,500 and double the number of communities to 20, Weinstein said.

Another proposal is to establish a temporary emergency housing-voucher program to help those who are struggling to make payments on their subprime mortgages.

The federal government should create a temporary category of 100,000 new Section 8 vouchers -- which have become the predominant form of federal housing assistance -- for families who have purchased subprime loans and are at risk of losing their homes or have already lost them. The vouchers could be used toward mortgage payments or to defray the cost of rent payments for those who have lost their homes.

While vouchers are primarily used by families to help meet their rental payments, they can also be deployed to help with mortgage payments, enabling low-income families to purchase homes, Weinstein said.

In addition, up to 20 percent of voucher funds can be used for subsidies -- called "project-based" vouchers -- that are tied to a building rather than to a particular family, and which can help pay for the construction or rehabilitation of housing for low-income families.

The cost of the current Section 8 voucher program is $15.9 billion annually, funding just over two million vouchers nationwide.

The demand for housing vouchers is roughly three times greater than the supply, Weinstein said. "Therefore, policymakers should create a temporary category of 100,000 new vouchers under a special program that would sunset after three years."

The third proposal involves using Fannie Mae and Freddie Mac to provide temporary liquidity and stability to the housing market.

Legislation introduced by Charles Schumer of New York would temporarily raise the limits on Fannie Mae and Freddie Mac's mortgage portfolios, thereby making about $145 billion available for the purchase of new mortgages.

"The current housing meltdown is the greatest immediate threat to our economy," Weinstein said. "A small investment now could assist millions" in saving their houses and help the country "avoid a much bigger bailout down the road."

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