Jonathan P. Baird

Possibly the worst aspect of our current recession is the dramatic rise in home foreclosures in New Hampshire and nationally. While New Hampshire is not doing as poorly as Michigan, Nevada or Florida, 3,000 families in the state are expected to lose their homes in 2008. That is worse than 2007 when more than 2,000 families lost their homes.
Along with this disturbing number is data which shows that more than 6 percent of home loans in New Hampshire are falling behind between 30 and 90 plus days. That is a higher percentage than elsewhere in the Northeast and worse than the rate of 35 other states. It certainly raises the specter of vacant, boarded up houses and homeless families.
With that in mind, it is surprising how weak the public policy response has been to this mess. There has been much commentary of the do-nothing or blame-the-victim variety. While it is apparently acceptable to spend untold billions on a pointless war, the idea of targeted help to homeowners is too much to contemplate.
To the extent Congress has shown itself prepared to act, lawmakers have been more interested in bailing out financial institutions than homeowners.
It is simply unacceptable for government to do nothing in the face of so many people losing their homes. Such inaction is equivalent to the Bush Administration’s response to Katrina. While there are homeowner situations which are financially hopeless, many are not.
A central problem is the adjustable interest rates on predatory sub-prime loans which have or will adjust upward.
The options presented to homeowners who have been victimized by sub-prime lenders is either some form of loan modification or foreclosure. That is because when interest rates are readjusted, which typically happens two years after loan origination, payments become financially unaffordable.
Very few of these homeowners can sell or refinance in this market. Mortgages often exceed property value.
It would be great if there could be more voluntary modification of loans. Last year President Bush urged lenders to work with homeowners to voluntarily adjust mortgages. Unfortunately, in the overwhelming majority of cases, lenders have been unwilling to renegotiate.
There is also the problem of locating the holder of the mortgage. It is hard to negotiate when you cannot find the holder of a resold, sliced and diced loan.
Government, which did nothing to prevent the subprime meltdown, should not default on its consumer protection duty. Government allowed unrestrained, unregulated greed to rule for years. Underwriting standards were obliterated.
Possible remedies
Ruling out any pro-consumer initiative as an unaffordable bailout is hardly fair. Discussion and debate need a chance.
There are possible federal and state remedies that deserve serious consideration. Probably most important is federal bankruptcy reform. Congress could allow mortgages on primary residences to be modified in Chapter 13 reorganization bankruptcies.
From 1978 to 1993, there was much precedent for successfully doing what is now proposed. Such modification is currently allowed and has also been allowed for family farms, investment properties, vacation homes, and commercial real estate. The sky did not fall.
Even though it looks now like the Senate is rejecting this bankruptcy reform, it must be pointed out that every major consumer organization in the country, including the Consumer Federation of America and the Center for Responsible Lending, supports the idea of this legislation. Doom and gloom scenarios about this legislation are grossly overstated.
Bankruptcy reform has the virtue of costing the U.S. Treasury nothing. Acted on promptly, it could allow thousands of families facing foreclosure to save their homes. There is a strong argument that lenders would fare better under loan modification than foreclosure.
A state response
In addition to federal reform, some states have pioneered policy responses. Last year Maine passed a Homeowners Protection Act that toughened underwriting standards and imposed a statutory duty of good faith and fair dealing on brokers. It added protections for high cost home loans and increased damages for predatory lending.
In 2004, North Carolina created a home protection fund pilot program to help unemployed workers. The program provides limited loan assistance for jobless families who can show reasonable prospects of resuming their mortgage payments. North Carolina’s program is modeled on a program from Pennsylvania, the Homeowners Emergency Assistance Program, that has been in place since 1983 and which has helped over 25,000 families maintain their homes.
While the North Carolina and Pennsylvania programs are not a response to the current sub-prime crisis, they show that states can respond effectively to a crisis where a significant loss of home ownership is at stake.
New Hampshire has a strong tradition of supporting home ownership. Foreclosure represents a personal catastrophe for the affected family. It is also an economic hit for neighbors who face depressed property values, a depopulated neighborhood and the likelihood of increased crime.
It is a mistake to assume nothing can be done to help homeowners. What is lacking is the political will to take it on.