Photo Courtesy of Bill Moyers Journal

Mortgage Emergency

Aug 18, 2008 | 10:17 AM

The Dodd-Frank bill to brake the collapse in housing values, signed by a reluctant President Bush just three weeks ago, is already far too weak to fix what's broken. The latest statistics are staggering. According to the firm RealtyTrac, there were 271,171 foreclosures recorded just in July. The Congressional Budget Office estimates, not disputed by Senator Dodd and Congressman Frank, that their bill, now law, will save just 400,000 homes from foreclosure over the next three years. Two to three million mortgages are projected to default this year alone.

And the problem is not just the foreclosures, but the effect on the broader housing market and on consumer purchasing power. Since most of the net worth of middle income Americans is their home equity, innocent people are being wiped out financially.

Both Frank and Dodd tried for much stronger legislation, but were stymied both by Republican resistance and by opposition from the Democrats' own Blue Dog Caucus of fiscal conservatives. Frank now says that much stronger medicine will be needed. More money to guarantee refinancing. More money for local governments and nonprofits to buy foreclosed properties, and get them re-occupied with first-time owners and renters, so that abandoned houses don't drag down property values next door and in the surrounding neighborhoods.

This collapse has been especially devastating for black homeowners' creditworthy black homeowners were cynically targeted by the subprime industry, to bring up the overall quality of the packages of subprime loans that they re-sold. But these homeowners got the same bait and switch mortgages, that have now reversed decades of progress in increasing black homeownership rates.

The existing legislation is also voluntary from the perspective of the lender. The mortgage company that holds the servicing rights has to make a calculation that a refinancing will bring in more money than continuing to squeeze the homeowner. And there will be plenty of litigation between the suckers who bought the mortgage backed bonds and the local lenders or servicing agents weighing whether to refinance. In short, the legislation is too little and too late.

An Obama administration would need to sponsor far more robust legislation--ideally something modeled in FDR's Home Owners Loan Corp., which refinanced homes at the government's own borrowing rate, and ended up refinancing one mortgage in five--(and returned a profit to the Treasury when it shut down after WWII.) The courts have also held that emergency alterations of private contracts such as mortgages by legislation are permissible in emergencies, which this surely is.

Whether the new administration acts decisively could spell the difference between recession--and depression.