Should Congress help borrowers?

Lawmakers are finding it difficult to mount large-scale help for homeowners.

Faced with a deep slump in housing and credit markets, Washington has found it easier so far to throw lifelines to big business than to ordinary Americans.

The Federal Reserve, for example, has engineered an unprecedented Wall Street rescue that involved an investment bank.

This month, the US Congress is starting to consider in earnest whether comparable assistance is warranted on Main Street.

Arguably, small borrowers face challenges that are every bit as acute as those of financial firms. Home values are declining and foreclosures are now occurring at record volumes – and those trends pose a threat to the health of the economy.

But it is proving difficult for lawmakers to mount large-scale help for homeowners for several reasons. One big hurdle is pragmatic: In some regions of the US, home values are still declining so fast that even a deep reduction in mortgage payments may help lenders more than homeowners.

Another is the question of fairness. Should taxpayer money be spent on borrowers who may have been unwise? The answer depends partly on partisan ideologies and on differing views of the risks to the economy if nothing is done.

"Any intervention is going to let some folks do better than they would have otherwise," says Dan Immergluck, a housing expert at the Georgia Institute of Technology in Atlanta.

The real question for policy, he says, should be "a benefit-cost, risk-reward kind of perspective."

The chances of large-scale help for homeowners, analysts say, will grow larger if the risks to the economy appear larger.

Many economists believe that the United States may endure a recession this year, but that moves by the Fed – coupled with the "stimulus" checks that Congress has arranged to send to taxpayers – will prevent it from becoming a deep one.

Still, America's job growth has turned negative in recent months, and home prices continue to fall – down 10 percent in the past year, by one index.

Potential relief measures

Those negative trends have helped build momentum for a mortgage relief bill in Congress. So far, the measures that would provide the most extensive help directly to homeowners haven't yet gathered the momentum required to clear a 60-vote hurdle in the Senate.

Such measures could go down one of two general tracks. One approach would use taxpayer dollars to prevent foreclosures, by refinancing or modifying home loans on terms the borrowers can afford. Another approach would seek the same result by other means, such as by allowing bankruptcy judges to essentially rewrite loans.

What senators did agree to put in a bipartisan bill last week were smaller measures. The bill would include $10 billion for states to issue bonds to help home­owners refinance and $4 billion for states to buy foreclosed homes. Both parties also support $200 million in new money for foreclosure-prevention counseling.

The bill also includes a tax break for industry – home builders in this case.

Many Democrats would like to mount more expansive efforts on behalf of home­owners. Sen. Charles Schumer (D) of New York raised the matter pointedly last Thursday in a hearing focused on the near-collapse of investment house Bear Stearns. The Fed intervened with a $30 billion loan, with the knowledge and support of the Treasury Department.

"Everyone agrees that Bear Stearns was staring into the abyss. What about homeowners who are also staring into the abyss?" Senator Schumer asked other federal officials.

The rationale for intervening on Wall Street, he noted, was the risk to the stability of the financial system. He argued that the same can be said of American home­owners: "Thousands and thousands of foreclosures create as much systemic risk as one investment bank."

Federal Reserve Chairman Ben Bernanke responded to such concerns by putting the $30 billion into perspective. He projected that most of the loan, possibly the entire amount, will be recovered by the Fed and will cost taxpayers nothing. "If you want to say we bailed out the market in general, I guess that's true. But we felt that was necessary in the interest of the American economy," Mr. Bernanke said. Moreover, Bear Stearns shareholders did not fare well in the resulting buyout of the company by JPMorgan Chase.

It's up to Congress, not the Fed, to consider actions to stabilize the housing market, Bernanke added.

Republicans are generally wary of committing big money to a mortgage rescue. Their argument is partly that the marketplace should be the tool of choice for resolving the housing woes. Banks and borrowers can work out the foreclosure questions, and buyers and sellers can determine when home prices will stop falling. A key question is whether that process will be orderly.

Large losses of wealth?

"The risk is that we'll overcorrect," says Robert Bruner, dean of the University of Virginia's Darden school in Charlottesville. A collapse in the housing market, driven by large inventories of foreclosed homes, could impose large losses of wealth on both Wall Street and Main Street, he says.

But some downward movement of house prices is needed, many say, to bring supply and demand into balance.

Trying to prop up home prices helps lenders minimize losses but may do little to help borrowers, says Dean Baker, an economist at the Center for Economic and Policy Research, a liberal research group in Washington.

"You're not going to be doing those people a favor" with policies that reduce their loan payments, if they still can't build equity in the home, he says.

In markets such as Phoenix and Miami, home values have been falling fast, and many recent buyers have negative equity. Judging by history, it could take several years for these markets to bottom out.

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