For the first time in U.S. history, the average home in America is worth less than is owed on it. That spells national economic disaster unless we take immediate action to stabilize the real estate market, coupled with long-term reform to address the root causes.
Last fall and early this winter, most homeowners, realtors, bankers, builders, and investors in Georgia’s 12th Congressional District had great concern for the real estate market, but an equally great concern that the federal government should not initiate an expensive bailout of the sub prime mortgage industry.
Most reasoned that there were countless bad loans made that should not have been, and that fiscally conservative lenders and borrowers should not be forced to pay the cost of those who were not.
That has changed for a simple reason. The more conservative lenders, borrowers, builders, and realtors are now also being dragged down by the worsening market. The choice is no longer whether they will pay, but how they will pay, and how to lessen what this crisis costs us all in the long run.
Everyone recognizes a common goal — stopping the rash of foreclosures, and allowing homes to regain their lost market value. The quicker we stop more homes coming on the market in distress, and clear up the existing inventory of bank-owned properties, the better off we will all be.
We need two plans — an emergency plan to stop the bleeding and stabilize the patient, and a long-term plan to cure the disease. The primary goal should be to protect homeowners.
The emergency plan
1. A 90-day national moratorium on foreclosures — Congress should enact an immediate nationwide ban on foreclosures for 90 days, allowing the mortgage industry and homeowners to restructure existing distressed loans.
2. A 7 percent national mortgage rate cap on new and existing loans — A new 7 percent rate, while higher than that available for good credit customers, would keep many families in their homes, and those homes off the foreclosure market, restoring equity for all.
3. Current homeowners keep their homes — Homeowners in arrears who restart their adjusted payments within 15 days of their lender notifying them of their new payment amount should be allowed to keep their home. Mortgage lenders therefore have a strong incentive to restructure loans and notify borrowers as rapidly as possibly, while homeowners in arrears have a strong incentive to immediately resume payments and stay in their home as their equity recovers along with the market.
To this point, cost to the federal government would be virtually zero — an absolute necessity in light of the equally calamitous federal deficit we face.
Long term reform
1. Insuring a healthy and responsible mortgage industry
Congress should appoint a nonpartisan commission to determine precisely what effect the emergency plan has on the industry, and to make recommendations to Congress within 180 days of any steps necessary to preserve a healthy, vigorous, and more responsible mortgage industry. We should not allow responsible lenders and borrowers to be driven from the market, and must be prepared to take reasonable and fiscally prudent steps to preserve consumers’ ability to obtain timely and affordable home loans. That may cost something in federal tax dollars; but we will probably all lose less this way than allowing the market to continue spiraling downward.
2. A permanent 7 percent national cap on mortgages
If a lender cannot approve a borrower at 7 percent interest or less, the loan probably doesn’t need to be made. Future market conditions may require Congress to adjust this rate, but a reasonable mortgage interest cap is in the vital interest of the long-term health of the real estate market and consumer protection.
And more importantly, it is the right thing to do.
The root cause of our current foreclosure crisis is usury, the charging of excessive interest on loans, and it flies in the face of the founding principles of our country.
The Bible, upon which most of our founders based their governing principles, specifically prohibits usury. After the Declaration of Independence in 1776, most states passed usury laws that capped interest rates at 6 percent. Over the next two hundred years, states gradually raised interest rates allowed under their usury protections.
But the big blow came in 1980 when Congress pre-empted all state usury laws on mortgages, allowing today’s adjustable rate and interest-only loans which created this crisis.
People who could not afford a reasonable home price and mortgage rate were pushed into homeownership anyway through these loans, which inflated real estate prices, leaving more families unable to afford a home under traditional mortgages, and the upward inflationary spiral continued until we face today’s crisis.
We can solve today’s foreclosure crisis by a return to historically-sound lending principles. By this time next year, we can have the majority of foreclosures off the market, and the equity of most homeowners back on the rise — not at the artificially inflated rates borne of the sub prime industry, but at reasonable and sustainable levels that build true equity and long-term financial stability for all Americans.
John E. Stone is a Republican candidate for Georgia’s 12th District seat in the U.S. House of Representatives.