Editorial: Move now to stem foreclosure flood

Last update: November 7, 2008 - 6:27 PM

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The mortgage mess •Twin Cities 2007 foreclosures: 12,974 2008 (projected): 19,936 Increase: 54 percent •Outstate Minnesota: 2007 foreclosures: 7,430 2008 (projected): 8,346 Increase: 12 percent •Minnesota totals 2007 foreclosures: 20,404 2008 (projected): 28,282 Increase: 39 percent Source: HousingLink

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The mortgage meltdown is worsening. On average, 2,700 Americans lost their homes every day from July through September, up from 1,200 during the same period a year ago, according to the Associated Press. The Mortgage Bankers Association reports that more than 4 million homeowners were at least one month behind in payments at the end of June, and a record half-million homeowners had entered the foreclosure process.

Dispiriting data can be found in Minnesota as well. The Minnesota Homeownership Center, using data from the HousingLink organization, reports that although the rate of increase in foreclosures is slowing statewide, 2008 will be another record-breaking year, with a projected increase of 39 percent over 2007.

Several factors suggest that the crisis could get worse and that a second, perhaps even bigger, wave of foreclosures may be possible nationwide. Among these factors are falling home values, which have an estimated 52,000 Minnesota homeowners “underwater” with mortgage balances greater than what their homes are worth, as well as the rapidly deteriorating economy and job market.

What to do may be in dispute, but few would disagree that the housing crisis is at the core of the financial crisis, which has created the conditions for a possible global recession.

The private sector has become more aggressive in reworking mortgages, via direct efforts with struggling homeowners or through coordinated efforts like HOPE NOW, an alliance between counselors, servicers, investors, and other mortgage market participants.
Ideally, this crisis would be solely handled by the lenders and borrowers, relying on the mechanism of the marketplace to eventually work through the problem. But it is becoming increasingly clear to many economists and public policy professionals that a coordinated governmental response is called for. Doing nothing on the federal level “is what we’re doing now, and it’s not working so well,’’ said Alice Rivlin, former director of the Congressional Budget Office and currently an economics studies director at the Brookings Institution.

Multiple proposals have surfaced in Washington, with a plan advanced by Sheila Bair, the head of the Federal Deposit Insurance Corp., gaining the most traction. Her plan calls for a government guarantee for mortgages that have been renegotiated by banks and borrowers. Any successful proposal will have to draw bipartisan political support and be acceptable to the vast majority of homeowners who do not face foreclosure.

President Bush, who has pledged his support during the transition, should make foreclosure legislation a top domestic policy initiative in the remaining months of his administration. It’s possible that no other single effort would do more to help his successor confront the tremendous economic challenges ahead.

Just as important, Americans must accept that help is needed not just for those facing foreclosure, but also for financially secure homeowners. More foreclosures translate into lower home values for everyone, which will exacerbate the economic crisis. It’s clear that although many struggling homeowners have been victims of the economic downturn or predatory lenders, others were simply irresponsible and took on too much debt. But the mortgage meltdown is like a flood. And whether the disaster is natural or man-made, it threatens to engulf everyone.

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