Las Vegas Sun

November 24, 2017

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Dead in the water: Your bailout

Sorry homeowners, Congress — under pressure from banks — cut the lifeline that could have kept you out of foreclosure.

More than 38,000 Nevada homes could have been saved from foreclosure with legislation defeated last week in Congress — done in by the one-two punch of a financial services industry that continues to have enormous sway and lawmakers unwilling to sharply alter housing policy, even in a crisis.

Lenders refused to support legislation to allow bankruptcy court judges to modify the terms of residential mortgages, a power they hold over mortgages on vacation homes — even yachts. But primary residences have been off limits.

The White House promoted the bill as an incentive in President Barack Obama’s housing rescue plan. The idea was to nudge lenders to rework loans before homeowners had to resort to bankruptcy. Critics say lenders are not doing enough to rewrite troubled mortgages.

“I hope the banks are proud of themselves,” said Senate Majority Leader Harry Reid, D-Nev., who supported the bill. “What they have done to our country. And now they are standing in the way of our trying to help a little bit, trying to help people who have a home and they cannot get any relief.”

A report from economist Mark Zandi at Moody’s says 1.7 million foreclosures nationwide could have been prevented.

Banking giant Citi backed the provision. But others in the industry warned the legislation would make home buying more expensive as bankers recouped losses by raising interest rates and requiring larger down payments. Loans on vacation homes, they argue, command higher interest rates in part because of the bankruptcy option.

The industry says it is rewriting loans at a brisk rate — though admittedly not keeping pace with the 8 million expected foreclosures in the next several years. Its Hope Now program is reworking about 116,000 loans a month nationwide.

The clout of the banking industry surprised many observers here. Wall Street gets no love these days as the nation reels under the Great Recession. Fewer than 5 percent of Americans hold the Street in high regard, according a recent poll.

“The banks have enormous influence,” said Ellen Harnick, senior policy counsel at the Center for Responsible Lending, a consumer advocacy group.

“It’s important for taxpayers to understand: The bankers who have received enormous help from taxpayers have not been willing to support what would have been an extremely helpful change in the law that would have prevented foreclosure.”

The banking industry spent tens of millions of dollars lobbying Congress in the past year. Some banks receiving bailout funding spent a combined $76 million on lobbyists last year and others contributed $37 million to congressional campaigns, according to the Center for Responsive Politics.

But that is only part of the story.

Despite Democrats’ enhanced majority in the Senate, made even greater last week when Sen. Arlen Specter of Pennsylvania switched parties, they couldn’t seal the deal.

Twelve Democrats voted against the amendment that Reid’s No. 2 man in the Senate, Assistant Majority Leader Richard Durbin, had pushed for years. The bill found only 45 supporters, none Republican. Nevada Republican Sen. John Ensign voted no.

The bankruptcy provision would have been especially important in Nevada, where half the borrowers are underwater — meaning their homes are worth less than the amount owed on their loans.

Nevada homeowners with substantial negative equity are unable to qualify for today’s lower interest rates through the Obama plan. The president’s plan requires that loans backed by Fannie Mae or Freddie Mac be no more than 5 percent above a home’s value to qualify.

The financial firm First American CoreLogic reports that 170,000 mortgage holders in Nevada owe more than 25 percent above their home’s value. In a state with a jobless rate now higher than 10 percent, bankruptcy may be the option of last resort for those cases, experts have said.

The House passed a similar bill in March on a party-line vote. Democratic Reps. Shelley Berkley and Dina Titus voted in favor. Republican Rep. Dean Heller opposed.

Scott Talbott, chief lobbyist for the Financial Services Roundtable, said the bankruptcy provision could have allowed virtually any homeowner to stop paying the mortgage, file for bankruptcy and get a lower payment.

“The guy next to you could get a deal just by claiming bankruptcy,” he said. “Is that fair?”

That’s a strong argument these days. Remember the populist outrage sparked when the cable TV commentator ranted about taxpayer bailouts for undeserving neighbors? A similar populist anger has not materialized for vacation homeowners going to bankruptcy court.

“In trying to help the small minority of people who unfortunately are in bankruptcy, we can’t raise the cost of housing on the 95 percent of people that will never have to suffer that experience,” said Sen. Evan Bayh, the moderate Indiana Democrat who tried to broker a compromise. He ultimately voted for the legislation.

Bayh and Specter had floated a proposal to limit the bankruptcy option to just those borrowers with subprime mortgages, the instruments at the root of the housing crisis. Several senators expressed support for this and the industry seemed receptive.

But Durbin had little interest in brokering such a deal. The Senate version had been pared back. Limiting it to subprime might have worked last year, when the Senate first tried unsuccessfully to pass the bankruptcy provision, but the housing crisis has now spread beyond subprime borrowers, his backers said.

After the legislation failed, the Obama administration issued a statement saying it “supports appropriately tailored bankruptcy legislation to provide a mechanism for homeowners who are out of other options” and looks forward to continued work with Congress on the issue.

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