Foreclosures are up, and the economy is down. Accordingly, the Fed is adjusting interest rates with an eye to easing the credit crunch (helped so far are mainly the big banks, since they are enjoying the lower rate borrowings but continuing to charge higher rates for lending money, keeping the spread for themselves), and Congress passed an "economic stimulus" package of tax breaks for businesses (even faster depreciation for business purchases than already allowed) and individuals (generous tax "prebates" from the government based on income and size of family). Congress also passed earlier a bill that permits homeowners to exclude certain cancellation of indebtedness income in connection with settling mortgage loans.
Now Congress wants to do something further to deal with the expanding foreclosure crisis, including raising the cap on tax-exempt mortgage revenue bonds by $10 billion and allowing states to use the revenues from the bonds to help homeowners in danger of losing their homes refinance. The bill would even extend the ability of businesses to use losses they have incurred. I'm not sure what I think of these provisions--I suspect that it is a good idea to let states become more directly involved in the foreclosure crisis, and creating a fund that can be used to refinance mortgages to ones that require more reasonable interest payments may make sense, if the aid is limited to those with low incomes and low mortgages.
Apparently, even the Republicans support the above package. But Mr. Bush has threatened to veto it if passed. The Senate tried to get to a vote today, but fell short of the 60 votes needed for cloture.
Who is against the bill? The banks. You see, the bill also includes a very reasonable provision permitting home mortgage loans to be modified in bankruptcy. According to this story in CNN.Money, "lenders are furious" about this possibility and assert that "cram-downs" will add significant costs to mortgages for everyone. Consumer groups like the Center for Responsible Lending and academicians say that the lenders are wrong and that it will help a number of borrowers without raising mortgage costs significantly for others. The ability to seek modification in bankruptcy would also give borrowers somewhat more leverage in dealing with lenders prior to that point, which also would be an appropriate change.
Yacht loans and credit card debts can already be modified in bankruptcy. It seems reasonable to allow home mortgages to be modified, too. Not everybody's mortgage loan will be modified, but in many instances--especially when the mortgagor has been pushed into a subprime loan at very high and unreasonable rates--it seems appropriate that the loan be modified and the homeowner permitted to continue in the home. The social costs of high rates of foreclosures are very high, and foreclosures in an area can bring everyone else's property values down. Since lenders are likely to lose either way (whether there is a foreclosure and an unsalable house or a loan writedown), it seems preferable to have the possibility of allowing the workout and keeping homeowners in their homes.
The bill also includes a provision that would permit state and local governments to use some funds received from the federal government to purchase foreclosed homes. That provision makes sense as well to me--government can step in temporarily to fill the gap in the dysfunctional market. As markets improve, government owned properties can be sold and the money available for more routine functions.
According to the BNA Daily Tax RealTime for 2/28, the Republicans are so against those last two provisions--bankruptcy modifications and states' use of federal funds to purchase properties facing foreclosures-- that they have offered their own stimulus. Their proposal is to make the 2001 and 2003 tax cuts and all the ones that expire in 2008 permanent, while providing a tax credit for the purchase of a new home or a home in foreclosure proceedings.
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