November 26, 2007


As the subprime meltdown continues, threatening Wall Street, Main Street and countless residential streets as well, consumer advocates are demanding federal intervention.

The scale of the problem is large and growing. Nationwide, foreclosures more than doubled in the past year, and Georgia struggles with one of the country’s highest foreclosure rates. Since January, 53,365 foreclosure sales have been scheduled in metro Atlanta. Two bills introduced in Congress would help more of those homeowners keep their homes.

Sen. Richard Durbin (D-Ill.) and Reps. Linda Sanchez (D-Ca.) and Brad Miller (D-N.C) have offered legislation that, among other things, would allow bankruptcy judges to modify the repayment terms of home loans on a borrower’s primary residence.

“The law should give American families facing foreclosure the opportunity to negotiate a workout on their mortgages. This bill may help them reach a degree of financial stability — even when the market cannot,” Durbin said.

Under current law, bankruptcy judges can modify loans for farms, vacation homes and commercial real estate but not for main residences. The bills would permit judges to help homeowners by lowering interest rates, extending the life of the loan or forgiving part of the debt. In areas with falling real estate prices, judges could reduce the principal of the loan to the home’s fair market value.

The North Carolina-based Center for Responsible Lending estimates such changes in the code would help about 600,000 families in imminent danger of losing their homes.

Lenders would fare better as well. In foreclosures, lenders end up with essentially the liquidation value of the house, says Ellen Harnick, senior policy counsel for the center. They also lose money to the many transactions costs foreclosure entails. So while lenders would lose if a loan was written down to a home’s fair market value, they would still come out better than if the loan was foreclosed and the lender received only liquidation value, Harnick says.

The industry itself has done little to stem the foreclosure flow and reduce losses on defaulted loans by rewriting mortgages with more manageable terms so borrowers can keep their homes. A survey of loan servicers by Moody’s Investors Services, a credit rating agency, found that most had only modified 1 percent of the exotic and subprime adjustable rate loans now causing so many problems.

Despite that lack of action, the mortgage industry opposes the House and Senate bills, arguing that tighter regulation and government intervention are unnecessary. That argument might be more convincing without such overwhelming evidence that the lending industry has failed to police itself. Now, with a possible economic recession looming, the government can no longer pretend that this is a blip in the market that will rectify itself. A quick and decisive federal response is required.

Among those testifying before Congress in favor of giving bankruptcy judges the authority to modify first mortgages was Mark Zandi, chief economist and co-founder of Moody’s

“Falling housing values, resetting adjustable mortgages for recent subprime and Alt-A borrowers, tighter lending underwriting standards, and most recently a weakening job market are conspiring to create the current unprecedented mortgage credit problems,” testified Zandi.

As a provider of financial research to clients around the world, Zandi handed Congress a bleak forecast:

“I expect approximately 3 million mortgage loan defaults this year and next, of which 2 million will go through the entire foreclosure process, forcing these homeowners to leave their current homes.”

Many people argue that those owners deserve to lose their homes since they bought more house than they could afford and now can’t honor their contracts. However, the skyrocketing foreclosure rate affects many innocent people as well.

The Center for Responsible Lending, a nonprofit research organization, estimates that 44.5 million households around the country will suffer property-value losses of $223 billion as foreclosures escalate. In metro areas in Georgia, an estimated 29,440 homes financed by subprime mortgages originated in 2005 and 2006 could slip into foreclosure, lowering the values of 743,581 neighboring houses by an average of $1,621.

The loss in property values in Georgia could total $1.2 billion, according to the organization. About half the states also will lose more than a billion dollars in reduced property values.

“These losses are particularly tragic when you consider that most subprime foreclosures never should have happened,” says Martin Eakes, CEO of the lending center and also head of Self Help, a credit union and nonprofit lending fund.

“The subprime industry became intoxicated with large fees from dangerous loan products,” Eakes says. “Unfortunately, lenders and Wall Street aren’t the only ones suffering through the hangover. The subprime problem has become everyone’s problem.”

Even homeowners who never missed a payment on their property pay a price when the house next door is abandoned to foreclosure. A 2004 study of blight in Philadelphia found that housing within 150 feet of an abandoned unit experienced a net decrease in sales price of $7,627.

Foreclosures also are linked to a rise in crime. Dan Immergluck, a Georgia Tech professor, and Geoff Smith of the Woodstock Institute, which studies low-income communities, found that an annual increase of 2.8 foreclosures per 100 homes corresponds to an increase in neighborhood violent crime of approximately 6.7 percent.

U.S. bankruptcy law — enshrined in the Constitution — was designed to give people a chance to reorganize their debts and get back on their financial feet without disrupting the social fabric. Certainly, widespread foreclosures threaten the social fabric.

Americans often are willing to bail out industries, albeit reluctantly, because they believe that the economy would be jeopardized otherwise. Well, the economy will suffer if millions of Americans lose their homes and thousands of once-solid neighborhoods are destabilized.

— Maureen Downey, for the editorial board (


Spillover costs of subprime meltdown by county:

……….Projected ….Nearby ……Average….Total losses

……….number of ….houses ……drop in….in property

………foreclosed….that will……house……value and

……… ……lose value ….value……tax base

Clayton….1,322……..51,396 ……$1,162……$59,719,826

Cobb ……2,315……..87,484 ……$1,673 ….$146,385,841

DeKalb ….2,782 ……122,975 ……$1,606 ….$197,464,958

Fulton ….3,393 ……155,704 ……$2,198 ….$342,196,197

Gwinnett ..3,798……..97,770 ……$1,684 ….$164,642,151

Source: Center for Responsible Lending, based on homes financed with subprime loans originated in 2005-06

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