RISMEDIA, Jan. 22, 2008-This week, the American Homeowners Grassroots Alliance (AHGA) called on President Bush and Democratic and Republican members of Congress to work together to craft a balanced short term economic stimulus package to head off recession and stem the surge in foreclosures that are driving the economy into a tailspin, and causing a surge in bankruptcies among American homeowners.”
Congress has grown increasingly partisan over the years,” observed AHGA President Bruce Hahn. “Democrats and Republicans are not going to resolve their philosophical differences over long term spending and tax policy any time soon. What is needed is a balanced two year package of both new spending and tax cuts, and non budget measures focused on heading off recession,” he added.
AHGA is encouraged by early signs that the two political parties agree on the magnitude of the threat, recognize that time is of the essence, and are attempting to put aside their long term philosophical differences.
There is clear indication that FHASecure and Hope Now, the joint effort to mitigate foreclosures by the Bush Administration and mortgage lenders and servicers, while constructive, are falling short of what is needed to stem the surge in foreclosures.
According to the Mortgage Bankers Association, the mortgage industry modified an estimated 54,000 loans, established formal repayment plans with 183,000 borrowers, and started foreclosure actions on approximately 384,000 mortgages in the third quarter of last year. Of the foreclosure actions, 142,000 were initiated against owner occupants and 242,000 were cases where the borrower did not live in the home, or did not respond to repeated attempts by the lender to contact them, or where the borrower failed to perform on a repayment plan or loan modification that was already in place.
Lenders will get further and further behind, and foreclosures will continue to skyrocket unless more drastic steps are taken. Such steps are in the interest of homeowners, mortgage lenders, servicers, and investors. Given that it was the abandonment of sound underwriting principles that caused the problem in the first place, the onus should be placed on lenders to establish that subprime borrowers can afford to pay higher interest rates at the time of scheduled rate adjustments, before rate adjustments are allowed to take effect in the future.
Accordingly Congress should temporarily freeze all subprime rates at their introductory rate level for the next two years on request of the homeowner on ARMs issued after 1/1/05 which have rate margins over 4%, unless the lenders can document that the borrower was informed of the margin at least 7 days before closing. It is clear from the number that are going into foreclosure anyway that some of the repayment plans are unrealistically stringent as well. During the next two years mortgage lenders would be allowed to evaluate borrowers on a case by case basis, and proceed with foreclosures in cases where homeowners are clearly unable to keep up with payments at the teaser rates, or where they are unresponsive to repeated contacts from lenders.
Legislation is needed to address liquidity problems in the jumbo mortgage market as well. To do that the Senate should immediately pass legislation similar to House legislation (H.R. 1427), which would allow the GSEs to guarantee mortgages of up to $625,000 in expensive markets. Congress should also raise the limits on Fannie’s and Freddie’s loan portfolios by 10%, as proposed in H.R. 3838 and S. 2169. The final reform component can be refined at a later date, but increasing their liquidity now is what is most important. None of these measures would have significant budget impact, but both would help address the mortgage meltdown that poses a major threat to the economy.
The economic stimulus package would have to include both spending and tax components to achieve bipartisan support, and that support is essential for any package to pass. There are many tax and spending proposals that would quickly infuse liquidity into the economy. However it is questionable from a political standpoint whether offsetting tax increases could be part of a consensus package and questionable from a policy standpoint whether offsetting tax increases would undermine short term stimulative effects of a package, even though resulting higher deficits could increase inflation.
AHGA believes that a sensible package would both immediately increase consumer spending across the board and immediately address significant major problem areas, such as the growth in foreclosures, growth in unemployment in states such as Michigan, and geographically broad sectoral problems, such as in new home construction. Giving all Americans below a certain income level a cash award from the Treasury (for example $500 to all those with taxable incomes below $100,000, whether they paid any tax in the prior year or not) would put a lot of money back into the system quickly since most of those individuals have immediate financial needs and will be less likely to save the proceeds than those at higher income levels.
Extending unemployment benefits by an extra 13 weeks or more and expanding housing, job training and food-stamp programs would help the working poor and/or those out of work, and providing direct aid to states most hard hit by the slowdown would allow them to avoid tax increases or program cuts. An expanded national housing trust fund would increase rental housing for the lowest income families and provide business for the hard-hit construction sectors.
A special fund for critical expenses that may not be covered by other programs could be used by cash-strapped homeowners and other consumers to pay for such critical things as health insurance or home heating oil. If each of these programs was funded for two years the economy may have recovered enough that additional extensions would be unnecessary.
The same approach should be taken on the tax side. Temporary tax cuts that would immediately increase consumer spending across the board, and immediately address significant major problem areas would be the most effective. Significant but temporary tax credits for first time home buyers would help stimulate home sales and help the real estate services sector.
To expand home ownership AHGA recommended that first time home buyers be allowed a tax credit of 10% of the home’s price, capped at $6,000. An affordable housing tax credit should also be enacted to create more homes for low income taxpayers. Homeowners, the building sector, and the environment would benefit from tax credits for energy efficient new homes and home remodeling (to be effective they would need to be increased substantially from prior levels).
Tax credits or other incentives to encourage telecommuting or the creation of home based businesses would help reduce automotive pollution, transportation infrastructure costs and would help small businesses, as AHGA pointed out in 2007 testimony to the House Small Business Committee.
AHGA does not believe that all the aforementioned proposals will end up in an economic stimulus package. “While we believe that all of them are needed, and all would have a positive immediate stimulative effect on the overall economy and/or sectors currently suffering the most, we recognize that a complex set of political factors will be at work in developing a consensus stimulus package,” said AHGA President Bruce Hahn. “We are convinced of their merit and hope that many may make it into a final package, but we recognize that American homeowners, like so many others who are suffering in this current economy, need to be flexible,” he added.
AHGA says that they hope that the nation’s political leaders will keep the need for flexibility in mind. While President Bush did not indicate his support for many of these proposals in his January 18 announcement of his package, hopefully he and House and Senate leaders will remain flexible and open to new ideas as they work through the process.
For more information, see www.AmericanHomeowners.org.