Congress and administration keep dancing as foreclosures keep coming.

I spoke to someone who is in danger of foreclosure the other day. They need help. They called project HOPE (which we have written about in several other places in this blog and in the main reference information on this site). They had to leave a message, and no one called back. As we have said before, HOPE and the other voluntary programs put into place by the administration to help with foreclosure prevention are nowhere near enough.Rep. Barney Frank, chair of a house finance subcommittee, tried to effect what I consider to be the best solution to the foreclosure prevention problem, which is to allow bankruptcy judges to “cram down” the balance on mortgage loans (as they are allowed to do with unsecured debt like credit card debt) to a level that made payments affordable to the homeowner. In this case, there is an existing mechanism (bankruptcy court) to review every loan, one by one, and to create a plan that is fair to both lender and borrower.

As Barney Frank argued, everyone would take a “haircut” in bankruptcy court, but the alternative, foreclosure, would be much worse. Under foreclosure, the borrower loses their house, the community gets one more empty house subject to vandalism, and the lender loses (on average) from $50,000 to $100,000. I think his plan would be better for everyone.

For reasons that are not clear to me, the lenders fought the bankruptcy court plan, and the administration threatened a veto. Since then, Congress has been trying to cobble together a plan that the administration would sign off on. The Senate and the House have come up with different plans, that now have to be reconciled, but they both have the same primary features: The lender lowers the mortgage to a point that is below the current market value of the house, giving some equity to the borrower. Then the FHA guarantees the new mortgage.

This is a pretty good deal for the lenders, but they are not getting behind it in any numbers, and the administration is still making noise about a veto because it would use tax dollars (of an unknown amount) to cover those loans that go bad under the new system, although they are now showing signs of being willing to make a deal.

And the dance goes on. It makes no sense to me that the administration would kill the Frank bankruptcy plan, which could accomplish the same end without any use of tax dollars and approve a plan that could cost the government billions of dollars.

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