Democrats Challenge GOP on Mortgage Mess

The first battle in what is shaping up to be a general-election war over the mortgage crisis occurred last week. On Thursday, the House voted 266-154 in favor of a bill, sponsored by Representative Barney Frank (D-MA), chair of the House Financial Services Committee, that would help homeowners at risk of foreclosure. President Bush threatened to veto the bill and Frank practically dared him to do so, saying that a veto would mean Bush has "stopped trying to govern" and was providing Democrats with talking point to use against McCain and Republican congressional incumbents.

Indeed, with some exceptions, the issue has become an example of the nation's partisan and ideological divide. The Democrats, including Senators Barack Obama and Hillary Clinton, want to provide a lifeline to troubled homeowners -- those who have already lost their homes and those on the brink of foreclosure -- and to toughen regulations on banks, lenders, brokers and investors who participated in the subprime rip-offs.

Most Republicans in Congress, however, including Senator John McCain, balk at using tax dollars to rescue homeowners and gasp at the idea of holding businesses accountable. They prefer to blame borrowers who got snookered by predatory lenders and brokers and to bail out Wall Street banks like Bear Stearns. (For an explanation of the origins of and solutions to the foreclosure crisis, see my article in the current issue of Shelterforce.)

Democrats will certainly use the topic to make their case that McCain and Congressional Republicans are woefully out-of-touch with the daily lives of ordinary Americans, hanging the foreclosure crisis around Republican necks-- the gravity of the expanding crisis giving some staunch Republicans in hard-hit districts pause and leading them to side with their ideological rivals.

In 2007, 405,000 households lost their homes, an increase of 51 percent over the more than 268,000 that were repossessed in 2006. The Center for Responsible Lending projects that 2 million families are likely to lose their homes in the next few years due to the current subprime lending crisis. More than 80 mostly subprime mortgage lenders went bankrupt by the end of last year.

But it is not just borrowers and lenders who are losing. Standard and Poor's reported that home prices dropped by more than 12 percent over a one-year period beginning in February 2007. As a result, property values and property tax revenues have declined. The U.S. Joint Economic Committee has projected a loss of $71 billion in housing wealth as a result of the mortgage meltdown. The U.S. Conference of Mayors projected that 10 states alone would lose $6.6 billion in local tax revenue.

The bill introduced by Frank would allow homeowners to shift from subprime mortgages they can no longer afford to federally backed mortgages. It would provide $300 billion in federal loan guarantees to lenders who agree to reduce the outstanding principal on loans. In exchange for a new mortgage, backed by the Federal Housing Administration (FHA), homeowners must share profits on a subsequent sale of their home with the government. The Frank bill also includes a one-time $7,500 tax credit for new homeowners to be paid back over 15 years, and $15 billion for states and localities to buy and rehabilitate foreclosed properties

Although the vote went mostly along partisan lines-- all 227 Democrats voted "yes" and 154 Republicans voted "no"-- 39 Republicans bucked enormous pressure from their party leaders and from the White House and voted "yes" on bill. (Thirteen members didn't vote.)

Indeed, most of the 39 Republicans who supported the Frank bill represent districts that have been particularly hard-hit by the mortgage meltdown. Seven of them are from Florida, five from Michigan, four from Pennsylvania, three each from New York and Ohio, and two each from Illinois, North Carolina, and Nevada.

One of Republicans who voted "yes" was Gary Miller, an arch conservative from the 42nd Congressional district that covers parts of Los Angeles, Orange, and San Bernardino counties in Southern California. According to RealtyTrac, the sprawling suburbs east and south of Los Angeles rank second among the nation's metro areas in the rate of foreclosures.

Miller told the Los Angeles Times "I really wish I could support my Republican colleagues. But I'm very concerned about the marketplace. A lot of people are losing their homes. That not only hurts them, but the neighbors around them because of foreclosure. Their home value drops."

The very ideological Miller, a developer, was being politically pragmatic. He faces a potentially tough challenge in November -- he is already politically vulnerable because of several pending scandals -- and he could not afford to toe the party line on the foreclosure issue.

Nationwide, one in every 194 households received a foreclosure filing -- default notices, auction sale notices and bank repossessions -- during the first quarter of this year, according to RealtyTrac. This is more than double the figure from a year earlier. But some states and metropolitan areas have been harder hit than others. In Nevada, one out of every 54 households faced a foreclosure filing. California ranked second (one out of 78), Arizona third (one out of 95), and Florida fourth (one out of 97). Of the 30 hardest hit metro areas, 11 are in California and 7 are in Florida.

The RealtyTrac list and map of metro areas with the highest foreclosure rates could be a roadmap for Democratic strategists. Overlay that map with Congressional districts where Republicans voted "no" on the Frank bill, and you have a list of GOP incumbents who could be vulnerable to the charge that they put party loyalty or close ties to powerful banking interests over the needs of their constituents.

Click the map to go to RealtyTrac's larger version.

For example, in Ohio -- hard hit by economic troubles and mounting foreclosures and where George Bush beat John Kerry by a slim 51 percent to 49 percent margin in 2004 -- six of the state's 18 Congressional seats are considered up for grabs. Five of them are currently held by Republicans. Republican incumbent Steve LaTourette, facing a tough challenge from Democrat Bill O'Neill, voted in favor of the Frank bill. (In fact, his vote for the bill and the funds it will bring to Ohio is the centerpiece of his Congressional webpage). In contrast, Republicans Steve Chabot and Jean Schmidt, who also face strong Democratic challengers and represent districts with many foreclosed homes, voted "nay." (In 2006, Schmidt beat Victoria Wulsin, who is running against her again this year, by only 2,500 votes.)

In Ohio's 15th district, Democrat Mary Jo Kilroy, a Franklin County Commissioner, is running against Republican state Sen. Steve Stivers, an Iraqi war veteran, to replace the retiring Deborah Pryce, a Republican. Two years ago Kilroy -- who helped create the county's Affordable Housing Trust Corporation -- lost to Pryce by only 1,062 votes. The district is centered in Columbus, where the foreclosure rate (one out of 144 households -- a 55 percent increase in one year) ranked 34th in the country. In the state's 16th congressional district -- based in the Canton area, which has been rocked by the mortgage meltdown -- Democratic state Sen John Boccieri, an Iraq veteran, is facing another state senator, Republican Kirk Schuring, to fill the seat vacated by Ralph Regula, a retiring Republican.

ACORN, the community organizing group, is targeting Minnesota Republican Senator Norm Coleman, who faces a tough challenge from author and humorist Al Franken. Last February, Coleman joined his fellow Senate Republicans in voting to block the Foreclosure Prevention Act of 2008. The bill, sponsored by Sen. Chris Dodd (D-Conn), chair of the Senate Banking Committee, was an early effort to address the mounting foreclosure crisis by providing federal funds for homeowner counseling programs and allowed bankruptcy judges to reduce the terms of a mortgage for people about to lose their houses through foreclosure. The vote went strictly along party lines, with only one Republican (Gordon Smith of Oregon) and one Democrat (Harry Reid of Nevada) voting against their party.

ACORN, which has been at the forefront of the fight against predatory lending for many years, sponsored a recent report, "Senator Coleman in the Pockets of Mortgage Bankers," (pdf) documenting Coleman's campaign contributions from the banking and real estate industry and his several votes against bills that would help homeowners facing foreclosure and strengthen regulations on these industries.

Minnesota's foreclosure problem is not among the nation's most severe, but the number of foreclosures is steadily growing. A recent study commissioned by the Greater Minnesota Housing Fund predicts that 28,000 homes will be foreclosed on in 2008, a 39 percent increase from last year. "If those projections are accurate," the Minneapolis Star-Tribune reported, " that means that one in every 31 households statewide will have gone through the foreclosure process from 2005 to the end of 2008." (The Housing Fund report, based on actual Sheriffs' sales occurring in Minnesota, is more than 50 percent higher than the number of foreclosures reported by RealtyTrac).

According to ACORN and other consumer advocacy groups -- including the National Community Reinvestment Coalition, the Center for Responsible Lending, the Greenlining Institute, the Consumer Federation of America, and the National Low-Income Housing Coalition -- both the Frank bill in the House and the Dodd bill in Senate had flaws, the result of efforts by the two sponsors to forge compromises that could garner some Republican votes.

Frank was more successful in winning over some Republicans, in large measure because House members are typically more sensitive than Senators to constituent concerns. To gain some Republican support, Frank -- a brilliant legislative strategist -- did not include some provisions that housing advocates wanted. One would have protected renters from immediate eviction when their landlords are foreclosed on. The other would have provided $300 million to prevent families from becoming homeless due to foreclosure. The advocates are concerned that few banks will voluntarily agree to refinance mortgages for imperiled homeowners, even with the carrot of FHA backing. And some advocates, such as the National Low Income Housing Coalition and the Center for Economic and Policy Research, worry that the Democrats' efforts to stem the decline in home values, a key goal of the FHA refinancing provision, may simply be propping up housing prices that were already inflated. (See pdfs here and here.)

Despite these caveats, the housing advocates, along with Frank and Dodd, recognize that as the foreclosure crisis worsens -- families are currently slipping into foreclosure at a rate of 7,000 to 8,000 a day, according to the Pew Center on the States -- it will become a clear symbol of the ideological and partisan divide that separates most Democrats and most Republicans and, thus, a major election-year issue.

Comments

[EinChicago]

Falling hom eprices is a disaster. A few parasitic posters basically fall into apoplectic fits of glee at teh idea, but for teh vast majority of teh country it's a major danger. Tax revenues fall, which means schools, roads, etc go underfunded. Consumers lose buying power which means people working in service industries lose jobs, etc. Priority #1 to turn teh economy around is to find some way to propo up home prices and get the market moving again. It;s that simple. everything else will follow.

[bushflipflops]

I don't see this as a bailout of the home owners, since all the government is doing is allowing them to remortgage at a fixed, lower interest rate, and having the government insure the difference between property value and mortgage balance. Wouldn't adjusting these mortgages so the home owners pay the entire balance back while keeping their home be much better for the economy instead of having them go into foreclosure?

Then you have to consider with more foreclosures you get falling home prices, which may sound great at first, but then you have to consider how much tax revenue local governments will lose due to a drop in property values. I believe Vallejo. California just had to declare bankrupcy for this same problem.

[raw915]

This time I agree with the Republicans. The old rule of thumb was, you don't borrow more than two-three times your annual income. The new rule is the sky's the limit. Now you can borrow ten or more times your annual income with no questions asked, no down payment, no principal payment, and huge future balloon payments. Why has the stock market been underperforming since 2000? Because that money has been diverted to the housing market. I own a house that cost less than my annual income and invest what I save in stocks. If I lose money in the stock market, should I expect Democrats to bail me out? No! The same goes for investing money in real estate. You gamble, you lose. Period! No bail outs from the Democrats this time.

[dannyS]

Yes, we should be allowed to sell anything - no matter how dangerous - and if you are dumb enough to buy it, T.S.

[egal]

Unfortunately for your disdain, in addition to the fools who bought houses they couldn't afford are those who worked their butts off, did everything right, and have been stripped of what little they could afford due to the failures of others, such as the owners of their apartment complexes. Letting people suffer for their own foolishness would force many to suffer who have done the best they could and sacrificed only to lose everything.

It will also fail to stop the raking-it-in jerks at the top and the corrupt lenders, both eager to catch people in traps by making them feel secure when they aren't (or the people dealing with their money aren't), so we would essentially be letting off all the people who caused the worst of the mess while punishing the ones they sinned against

[bentenrai]

I don't know raw915, those businesses have been doing this for a while. You can't say the same for the the home buyers. We feed the economy of this country by encouraging consumer mentality, not responsible consumer mentality. I recall seeing ads on TV not so long ago, touting that it didn't matter if your credit history was bad, you would be able to receive money from lenders and buy your dream home. I call that cynical and self-destructive capitalism. It's not true capitalism.

[EinChicago]

"This time I agree with the Republicans. The old rule of thumb was, you don't borrow more than two-three times your annual income. The new rule is the sky's the limit. "

Ahhh. The moron refrain. Apart from how simplistic this is, the old rule of thumb was always you don't borrow 3-4 times income because with mortgage rates around 9-12%, that would equal payments of around 36% of your gross pay. Interest rates are effectively half that so the rule of thumb you espouse, means you don't borrow more than 15-20% of your gross pay. The only way your idiotically simplified rule of thumb applies is if mortgage rates double.

[JoeBlough]

Housing prices are not really falling. They are simply returning to their proper value. Houseing prices double, but the value doesn't. All these MacMansions were over priced and the suckers lined up to buy them. Now prices are returning to true value. That is, unless the government gets involved and screws everything up again.

[Mike O.]

The first sane analysis I've seen. And for the real estate challenged, "blown out" appraisals are illegal and were illegal prior to the sub-prime "crisis". Borrowers and lenders alike were in a feeding frenzy over the nearly free credit. Those that were responsible got some great deals and made some money. Those that weren't, well you know what happened.

Here's a clue: When euphoria is high, get out because a crash (correction) is imminent.

[watererbob]

Part of the reason for this mess is that developers have (for the most part) stopped building modest homes that the middle class can afford! Local govt. has gone along with this trend in an effort to raise the Tax base.
I my capacity as a lic. Texas landscape irrigation specialist, I've seen the results - McMansions on acre lots owned by struggling middle class families with both parents working two jobs, and the kids pretty much left on their own. All so that the kids get into a "good school" in a "nice neighborhood"!

[rollingdivision]

First, most of these owners are upside down, they owe more than they have equity in the house. This is because these owners didn't put anything down to get their loans, so they lose nothing in foreclosure. But for those who do have equity, state laws restrict the lender and do not allow the lender to recoup more from the sale then what is owed, so the owner will get his equity even in foreclosure. The millions of foreclosures will cause lower housing prices and increase home affordability for tens of millions of families who have maintained their good credit. Who says housing prices have to increase every month, quarter or year? And the US economy will recover in a matter of months. The savings and loan fiasco was cleared through the economy in about 2 years and internet/tech bubble and crash cleared in about 18 months. So, why would this be any different?

[Mike O.]

18-24 months is entirely too long because the government needs to make this go away for me right now!

[rollingdivision]

The best thing would be for people who can't make their mortgages to go into foreclosure, assuming they choose to. Failure and bursting bubbles are normal and healthy in a market. A large portion of these “homeowners” were buying to flip the property as quickly as possible and never planned to pay the mortgage for more then necessary to get to the quick profit. The evidence of this is the complete lack of correlation between unemployment and the foreclosure rates in the areas with the highest foreclosure numbers California, Florida and the affluent Washington DC suburbs. These aren’t hard working people who have lost their jobs and now can’t pay for their homes. No, these are speculators riding the bubble from house to more expensive house not buying a home for their family. People buying houses with mortgages they couldn't afford as of day one were speculators and should lose their houses.

[McLaren]

It's Deborah Pryce, not Price, and the district is centered in Columbus, not Columbia. Also, in this bill Frank wants to give $millions to the separatist, anti-American and race-based La Raza for "mortgage couseling."

How many people need "mortgage counseling" from the group that wants to retake half the Southwest for a specific race?

[Ohiomom]

Steve Stivers, the Republican candidate for Deborah Pryce's seat (Ohio's 15th congressional) district is a former bank lobbyist. He has continued to work hard for banks, mortgage firms, and insurance companies. Stivers also stated his opposition to increasing the Ohio minimum raise and in limiting payday lenders' interest rates. Stivers believes that the payday lenders should be able to charge 300%, if they so choose. It is just what we need in DC, another bank lobbyist.

[Mike O.]

Do you have any idea what the default rate is on Payday style loans? These lenders assume an enormous risk when making those loans. To regulate the rate will regulate the availability of these types of loans. These lenders are sometimes the only recourse that someone has to make ends meet. I know, I have used them before. I didn't like it, but I had to do it at the time. I'm now a debt free homeowner through my own hard work and dilligence. That's why I will make no excuses for people who get themselves into financial trouble. The key portion of that sentence is "get themselves". They got into it, they need to get themselves out of it.

I guarantee they won't make the same mistake twice.

[rollingdivision]

If I were trying I'd be hard pressed to devise a more damaging scheme associated the "mortgage crisis". This scheme rewards the most irresponsible at all levels, home owners, lenders, investors and speculators and punishes the responsible. So tens of millions who wisely chose to purchase homes they actually could afford, who weren't speculating in the housing market, who pay their mortgage on time every month, who work hard to earn the money to be responsible will now be taxed to pay for the irresponsible and speculators. Wonderful, so do the right thing live in a $125,000 home you can afford and you get to pay to bail out the fellow in the $400,000 house and all the fools who speculated in the mortgage market and made the irresponsible loans. And just to make it even worse, the feds are gonna borrow the money from the Chinese by issuing more US debt and further weaken the dollar. It's Robbin Hood in reverse and by the Democrats.

[bgregs]

Unless, of course, we look at the fact that if the MILLIONS lose their homes (which is what it's looking like it will be!) then the US economy will either NEVER recover (as the US, anyway) or at least that it will take DECADES for the fallout to finally disappear.

Now then, I agree about one thing. I don't like the idea of helping speculators who didn't realize that the market would finally collapse, but to kick people out of their homes, simply because they were victims of the economy of the time........

And I will say, I went for as cheap as I could in my area, and I got lucky to get in when the seller was getting kind of desperate, but the first two homes that I bid on I got turned down by the sellers, because they refused to sell the home for less than a 20% profit on an already inflated value.

[chinacatsunflower]

so where are all these $125K homes anyway?

[bgregs]

I think that I saw one in the middle of Kansas more than 250 miles from the nearest town......

[Sciguy]

I like the idea of changing subprime loans to (presumably) fair loans backed by the FHA. It's pitiful that loan sharks out there got away with snookering people into subprime loans - though the snookered need to accept some of the blame, too. Remember that old adage "If it looks to good to be true, it probably is"? I also like the idea of requiring the homeowners to share the profits from later sale of the home with the FHA.

It would be nice if judges could lower the mortgage rates to reasonable ones. However, that would mean judges enforcing usury laws, and we can't have that, can we? That's why "regular" usury laws are easy to find, but the rates that banks can charge by law are different and well-hidden.

As far as using taxpayer dollars to bail out the snookered - I have mixed feelings about that, but the bottom line is, of course, whose tax dollars are these, anyway? Shouldn't tax dollars be used for the public good? And isn't having people keep their homes "good?"

[bgregs]

"As far as using taxpayer dollars to bail out the snookered - I have mixed feelings about that, but the bottom line is, of course, whose tax dollars are these, anyway? Shouldn't tax dollars be used for the public good? And isn't having people keep their homes "good?""

Exactly! That's a primary purpose of the US government:

We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, PROMOTE THE GENERAL WELFARE, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

[bgregs]

What a surprise, my representative (Judy Biggert, IL 13th) voted AGAINST the measure. This is the same woman who I wrote to back in September of last year when the gas prices near my home jumped up 45 cents in ONE DAY, and who replied back to me with a form letter explaining how Hurricane Katrina had reduced refining capacity!

[alohaboxer]

Wow. that gas price thing really does let you know what a democratic congress can do. But blame the republican minority for that 60% increase during their minority rule.

LET THE CRISIS WORK ITSELF THROUGH! WITH NO GOVERNMENT BAILOUT! Seriously, if you throw lifelines everytime an irresponsible consumer, searching for happiness with overextended credit, nice houses and cars, get is in trouble, you are going to create a nation of whining babies, who look to the government to give them everything, and blame the govenment for everything they don't receive...or everything they suffer.

Oh, sorry...by the looks of most of the posts on this site, that is exactly what we already have.

[sesshoumaru]

I agree. Who needs a nation of productive healthy people who never go bankrupt due to medical bills. What's that? Japan you say? Oh. Well who needs a nation where you can be assured that you wont be sold a silly mortgage written only to enrich the financial sector while promising that you would return to refinance said mortgage guaranteeing a market of future transactio­ns........­..What's that you say? The U.S. before the repeal of the Glass-Steagall Act?

[bgregs]

I'll say this, I actually partially agree with you. We need to get through this and all that the bailouts we've done so far have done is delay the final reckoning. However, were we to actually bail out the BORROWERS, that would help the LENDERS and the whole thing would cost less money AND give us a solid base to start re-building!