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FINANCIAL SYSTEM IN CRISIS

No easy fix for owners

Home loan plans in Congress face political and practical obstacles.

September 25, 2008|Jim Puzzanghera | Times Staff Writer

WASHINGTON — Lawmakers, housing advocates and both presidential candidates are demanding that any bailout for financiers on Wall Street needs to help homeowners on Main Street too.

But it's easier said than done.

The main proposals for helping struggling homeowners call for allowing the federal government to restructure mortgages it would buy under the Bush administration's $700-billion bailout plan, and to give bankruptcy judges new powers to force lenders to accept revised home loans.

Both face practical and political problems, and there's no consensus that the measures would actually work.

Asked at a congressional hearing Wednesday about the change to bankruptcy law, Treasury Secretary Henry M. Paulson said it could backfire by scaring banks away from making loans that could be revised in court against their will.

"We want to encourage lenders to lend for mortgages," he said. "I think that's the opposite."

But housing advocates say it is crucial for average homeowners to be addressed in the bailout plan being negotiated on Capitol Hill, instead of hoping that simply easing the credit crisis on Wall Street eventually will ease the foreclosure problem.

"If you came down the road and saw a wreck with the bleeding people all over the sidewalk, would you fix up the car first and then pick up the people who are bleeding?" asked the Rev. Jesse Jackson, president of the Rainbow/PUSH Coalition. "The homeowners are not asking for a bailout. They're asking for a restructure of their loans . . . that should have been the lead item as a way to salvage the hardworking American homeowner."

Several ideas have been floated for helping homeowners who are facing foreclosure, including having the government allow those who cannot afford even restructured loans to remain in their homes as renters.

The two most frequently mentioned proposals revolve around restructuring subprime mortgages made to people with shaky credit.

The first would have the federal government revise the mortgages it would acquire under the Bush administration's proposal to buy up mortgage-backed securities stuffed with bad loans. But those securities, held by a mortgage trust, are similar to corporate bonds, meaning that you can't force changes in most cases unless you hold two-thirds of the securities, said Adam J. Levitin, an associate law professor at Georgetown University.

"It's like buying a bond -- the bondholders don't get to choose the board of directors," he said. "Controlling mortgage-backed securities does not mean you control the terms of the mortgages underlying them. That control is based on lots of factors that are stacked against the government and which are out of the government's control."

Andrew Jakabovics, associate director of the economic mobility program at the Center for American Progress, a liberal-leaning think tank, said that problem could be addressed by the government threatening to remove a favorable tax provision for mortgage-backed security trusts that do not cooperate.

But he stressed that the bailout wouldn't work if Washington didn't address the underlying problem: foreclosures.

"You're trying to bail out a tsunami . . . if you don't get to the source of the problem," Jakabovics said.

The second most frequently mentioned proposal to stop foreclosures, as Jakabovics and others have said, is to allow bankruptcy judges to restructure loans over the objections of lenders -- a practice known as a "cram down."

But changing the bankruptcy laws faces opposition from bankers in addition to skepticism from the Bush administration.

"If a bankruptcy judge can say, 'We're going to cram the price down,' that increases the loss that comes off of that and makes it harder to make new mortgages," said Wayne Abernathy, executive vice president for financial institutions policy at the American Bankers Assn.

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jim.puzzanghera@latimes.com

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