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Homeowners need some help, too

By Robyn Blumner
In print: Sunday, September 28, 2008

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If Congress can get it done, we are about to spend astronomical sums to shore up a financial sector that has done its utmost to trip up the financial footing of average people.

Millions of Americans are in danger of losing their homes because they succumbed to the allure of borrowing too much money against their homes or buying one they couldn't afford. Those who sold these mortgages knew these borrowers didn't really qualify. But because the banks and investment houses quickly sold off the hot potatoes, they didn't care whether the homeowner would one day face wrack and ruin.

Up until days ago, Sen. John McCain was a supporter of the policies that have put us in this mess: less regulation of the financial sector, a position consistent with a core principle of the Republican Party and the Bush administration. But what he and his party conveniently forgot is, even in nice neighborhoods there's a need for a police department.

Now President Bush and Treasury Secretary Henry Paulson want to throw Wall Street a $700-billion lifeline. (The deadline for this column came before any deal was worked out with Congress.) The financiers, who walked away with millions in bonuses thanks in large part to all the now-toxic securities they packaged and sold, would get a bailout from the rest of us.

Smart people are saying it's the only thing that will stave off catastrophe. Maybe so. But those who tanked our economy shouldn't get all the help. How about a bit for Candace Weaver?

Weaver is an eighth-grade teacher in North Carolina who didn't realize that she was putting her financial security at risk when she refinanced her home in 2005. Weaver claims she was never offered a fixed rate loan and was never told that the adjustable interest rate on her new loan could increase from 8.8 percent to more than 11 percent in two years, as it did.

And then she got cancer.

When Weaver contacted her mortgage servicing company for a modest restructuring, she says it refused to budge. Her home is now in foreclosure, even though she has a steady job and can afford to pay a reasonable amount each month.

What Weaver needs is a bankruptcy judge to give her some breathing room.

Bankruptcy court can restructure every type of residential loan and secured debt with the exception of a mortgage on your primary residence. You own a vacation home, a yacht, investment property? A bankruptcy judge can adjust the terms of those loans. But the house you have for permanent shelter? Sorry.

It's patently unfair, says Guy Cecala, who publishes Inside Mortgage Finance. He says that "speculators have more protection than homeowners do."

The mortgage industry is fiercely opposed to giving bankruptcy judges the power to make reasonable modifications. It argues that if judges are given that discretion home loans will freeze up, becoming unavailable, and that mortgage rates will go up.

Neither one will occur, and we can look at past experience as our guide.

For 15 years between 1978 and 1993, numerous bankruptcy judges thought they had the authority to adjust mortgages on primary residential mortgages and did so. That's the time between when the modern Bankruptcy Code was enacted and a U.S. Supreme Court decision making it clear that mortgages on primary residences were not subject to change in bankruptcy. And in that time, according to Martin Eakes of the Center for Responsible Lending, there were no differentials in the cost or availability of credit between the jurisdictions where bankruptcy judges modified mortgages and where they didn't.

The financial meltdown is the culmination of a 20-year deregulation frenzy, during which time people like Weaver were steered into loans they didn't understand and couldn't afford. Okay, maybe they weren't smart about their finances, but neither were all those Wall Street geniuses.

Any bailout needs to include homeowner relief. The fact that Paulson's plan didn't indicates that the administration is still looking out for the wrong people.