Inquirer editorial on the need for a homeowner rescue fund

The Inquirer today has an editorial calling for help for struggling homeowners. It mentions a rescue fund that Rep. Dwight Evans and Rep. Pete Daley called for here in Philadelphia back on May 11th. I testified on behalf of PUP on the need for such a fund at a hearing that same morning.

Status report from the editorial. Basically, still at Square One:

The Homeowner's Equity Recovery Opportunity (HERO) program, is intended to help homeowners in the direst situations, including where, because of inflated appraisals by lenders or a fall in housing values, the amount of the mortgage is larger than the value of the house.

Brian Hudson, who heads the Pennsylvania Housing Finance Agency, which created HERO and a separate "refinance fund," still hopes to receive state money.

For now, he is dipping into PHFA's reserve funds and reaching out to individual municipalities and foundations to come up with enough money to get things going. PHFA needs the start-up money to back bonds it would issue to pay for the HERO program.

So why should you care? First of all, if banks and lenders don't get paid back, credit is going to become more expensive. The money supply will be lower. That's basic economics.

Here in Philadelphia, though, it's a much bigger deal. I think we need rescue funds and that the Commonwealth should step up, but there's also some commonsense steps that the lenders themselves could take, and stay in the black in the bargain.When a lot of these folks lose their homes to foreclosure, they are just going to end up standing empty. Sure, some houses get picked up at Sheriff's Sale and new people move in, but a lot of them get picked up and no one moves in.

Moreover, once the foreclosure process starts, owners tear up homes and let them fall to pieces. The more empty homes we have in neighborhoods, the weaker they are, the more decay they'll see, which leads to crime and blight and all the stuff we don't want.

The solution is pretty simple: throw out the ARMs. Lenders thought they could make a lot of money off of people with ARMs when interest rates inevitably rose and they weren't able to make as many new loans in the prime market. Well, they were wrong. As the interest rates readjust, folks are failing to keep up, so, rather than bringing in more money, they are bringing in no money.

If you accept the proposition that lenders lose money on foreclosures (and I do), then the answer is simple: modify the loans to a fixed rate that the homeowner was able to keep up with before the rates adjusted up. That way, money will still keep coming in. They will continue to make a profit, too, it just won't be the killing they were hoping for.

The Russellian Incorporated Innovations Corporation

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