With foreclosure proceedings starting on more than 6,000 homes a day, House and Senate lawmakers are advancing similar versions of a measure that could help many troubled borrowers. Lenders and investors also would come out ahead of where they'd be if they had to repossess the homes. And although it wouldn't stop home prices from dropping further, it could help the market level out sooner, reducing the drag on the rest of the economy.
Still, critics of the proposal (HR 5830:h.r.05830: in the House and known in the Senate as the Federal Housing Finance Regulatory Reform Act of 2008) complain that it would bail out bankers and borrowers who placed losing bets on a volatile housing market. The potential beneficiaries would include lenders that doled out jumbo loans to borrowers with no proof of their ability to repay, investors who paid premiums for packages of risky mortgages and home buyers who counted on rising property values to rescue them from debt loads they couldn't afford.
Those aren't the only ones who stand to gain from the bills, however -- or to lose if the rate of foreclosures doesn't abate. As the Wall Street Journal has reported, a high percentage of the borrowers stuck in costly sub-prime loans were steered into those mortgages by brokers and lenders even though they qualified for lower-interest prime loans. More important, foreclosures are driving down the value of entire neighborhoods and putting more borrowers at risk of owing more than their houses are worth -- making it almost impossible for them to refinance or obtain new credit. Unless borrowers get more help, the high rate of foreclosures is expected to continue well into next year.