Weeks After Bank Bailout, No Help for Homeowners

BOSTON - Nearly five weeks after
Congress gave the nod to a 700-billion-dollar bailout fund, and as the
economy sinks deep into a recession, no definite plan is in sight for
struggling U.S. homeowners.

"We have the potential for a
true economic disaster," said Susan Wachter of the Wharton School of
Economics, at a congressional hearing Thursday.

"Let us remind ourselves that the problem came from housing," she said.

It is unclear how help will be delivered to U.S. homeowners, who are defaulting on loans at record rates.

"The foreclosure problem is getting worse, not better," said
Martin Eakes, CEO of Self Help and Centre for Responsible Lending, a
non-profit, community development organisation, on Thursday, at the
hearing of the Senate Banking, Housing and Urban Affairs Committee.

Congress meets next week to decide whether to dole out 25
billion dollars or more to the auto industry, and maybe craft a bill to
assist the unemployed and create jobs. But there is no congressional
plan on the table to assist homeowners. Congress may then recess until
January.

Treasury Secretary Henry Paulson, who is in charge of
disbursing the 700 billion dollars, said Wednesday that his next target
for funds is the credit card, student loan and auto loan industries,
but not homeowners.

"We continue to explore ways to reduce the risk of
foreclosure," he told reporters. Paulson mentioned a new programme
underway by the quasi-public mortgage lenders to make new loans
currently being written more fair. The private lending industry is
being encouraged to voluntarily follow suit, Paulson said.

Sheila Bair, chairwoman of the Federal Deposit Insurance
Corporation, has drafted an aggressive plan for assisting homeowners in
trouble, based on the idea that monthly mortgage payments should not be
more than 31 percent of the household income. That plan appears
stalled, possibly on hold until January and a new administration.

On Jan. 20, Barack Obama will become president, and his
cabinet will have control of the remainder of the 700 billion dollars,
probably about 350 billion dollars. It is not known if Obama also would
tap the Treasury fund to help homeowners. Obama backs the idea of
letting bankruptcy courts modify loans in foreclosure.

Eakes said he supports Sheila Bair's proposal, and Obama's idea that judges should be allowed to modify mortgages.

Lenders need a mandate, because they are not voluntarily
working out better terms on troubled mortgages, Eakes said. Credit
Suisse, a large mortgage lender, reported recently that it modified
just 3.5 percent of delinquent subprime loans in August, its most
recent figures, he said.

Until foreclosures are stemmed, the overall economy will not be able to dig itself out of trouble, Wachter said.

"The economic downturn could become ever more severe due to the
interaction of financial market stress with declines in house prices
and a worsening economy all feeding back into and adverse loop,"
Wachter said.

Foreclosure filings increased 5 percent in October, to 279,561
homes, according to RealtyTrac. Arizona, California, Florida, Georgia,
Michigan, Nevada, New Jersey, Ohio and Texas saw the highest rate of
foreclosures, said the firm.

As the nation heads into the New Year, nearly 3 million
families will have lost their homes, and 2.3 million more will be
adrift as of the end of 2009, according to an analysis of Mortgage
Bankers Association data by Eakes's group.

"These losses, in turn, are infiltrating nearly every part of
American life, from police and fire protection to community resources
for education," Eakes said.

The Organisation for Economic Cooperation and Development
announced on Thursday that 30 developed nation economies had sunk into
a recession, including Japan, the United States and most of Europe.

Their economic output is expected to shrink through 2009, with
the U.S. economy the worst off, said the organisation, based in Paris.
The OECD began analysing economies in the 1970s and it is the first
time it has seen such a large group of economies simultaneously slide.

The news comes as leaders of the world's richest 20 nations
gather Friday and Saturday at the White House to discuss coordinated
efforts to ease their ailing economies, like tax incentives and
regulation.

Bush, whose administration has embraced a hands-off, free-market ideology, indicated he would be opposed to efforts to regulate.

"It would a terrible mistake to allow a few months of crisis to undermine 60 years of success," Bush told reporters Thursday.

Today's economic crisis can be traced back to unscrupulous
actions of some lenders, who wrote millions of mortgages with sky-high
interest rates and other unfair terms that homeowners are now unable to
meet.

"Today's financial crisis is a monument to destructive lending
practices -- bad lending that never before has been practiced on such a
large scale, and with so little oversight. Unfortunately, the entire
country is paying the price," Eakes said.

Banks bought and sold the high-risk mortgages, and created
complex investment products from them that they traded around the
globe, earning record profits. The complex mortgage products and their
trading was unregulated. Now that homeowners are defaulting on their
loans, many of the investments held by the banks are almost worthless.

"Well before the foreclosure crisis erupted into the public
eye and began to dominate news headlines throughout the country,
[non-profit organisations] pleaded with Congress, the administration,
and the financial services industry to quickly take sweeping measures
to keep borrowers in their homes," noted Nancy Zirkin, president of the
Leadership Conference on Civil Rights, at the hearing.