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Bringing bankruptcy home

January 18, 2008|Jack Kemp | Jack Kemp, a former secretary of Housing and Urban Development, is founder and chairman of a strategic consulting firm in Washington.

When I was Housing and Urban Development secretary in the administration of President George H.W. Bush, we fought against economic pessimism every day in the effort to spread the American dream of homeownership, particularly for moderate- and low-income families. Over the last 15 years, homeownership, especially among people of color, has risen to historic levels. In just the last five years, 2.8 million families bought their first homes. Now, the sub-prime mortgage crisis is threatening to roll back this progress.

It is clear that sub-prime loan foreclosures are only going to get worse. How can the government help homeowners without putting taxpayer dollars at risk or sending the wrong signals to the housing market?

There is no single answer. Some ideas being floated are intended to bail out Wall Street fund managers who made bad decisions on mortgage-backed securities. Other proposals have the unintended effect of propping up investors who bought property for speculative gain. Some notions, such as programs to educate and counsel homeowners, are a positive but small step. But the reality is that markets do work, and although credit markets are in distress, progress is being made.

I applaud the White House efforts to encourage mortgage servicers to modify existing adjustable-rate loans for a limited number of borrowers who cannot afford interest rate resets. However, depending solely on the goodwill of an industry that bears no small measure of responsibility in this crisis is unlikely to be the full answer.

What is missing is a rational and urgent push to help the estimated 2.2 million families in danger of losing their homes to foreclosure in the near future. Congress is considering a small fix that would have more impact on these families than any other option under consideration: temporarily allowing bankruptcy courts to give the same relief to homeowners on principal-residence mortgages that businesspeople get on real estate investment loans, that farmers get on farm loans and that individuals receive on loans for vacation homes, cars, trucks and boats.

Bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property -- all secured loans, that is, except those secured by the debtor's home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets -- their homes -- and leaves untouched their largest liabilities -- their mortgages.

In the absence of modification, many of today's loans will result in foreclosure. When servicers are unwilling or unable to voluntarily modify exploding, unsustainable home mortgage loans, Congress has a duty to consider involuntary modification in bankruptcy court, where the same relief is granted on all other secured loans. The proposed Emergency Home Ownership and Mortgage Equity Protection Act being considered by Congress would do just that. It is targeted at only sub-prime and nontraditional mortgages and will be available for only seven years after it is enacted in order to mitigate against the next wave of exploding interest rate resets.

The key is to avoid an overreaction that would have negative long-term effects on the housing market. Allowing certain distressed homeowners limited bankruptcy protection provides the greatest potential benefit with the least market disruption, and it will not cost the Treasury a dime. Moreover, a tweak to the bankruptcy code is a narrowly targeted solution. It is estimated that more than 600,000 homeowners could use bankruptcy protection to modify their loans and stay in their homes.

Some argue that expanding bankruptcy relief for homeowners would encourage frivolous bankruptcy filings, but recent reforms have made filing a very onerous process. People who bought homes with the intent of flipping them two years down the road are not going to go through the aggravation, embarrassment and cost of bankruptcy.

Why do we need to keep people in their homes? As HUD secretary, I saw firsthand that homeownership makes neighborhoods safer, encourages investment and raises our overall standard of living. People care more deeply about their neighborhoods if they have an ownership stake.

Homeownership is not about left or right, conservative or liberal, Democrat or Republican. The House Judiciary Committee has passed a bipartisan compromise version of the bill, and the full House is expected to take it up next month. Both the House and Senate need to pass it -- and soon.

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