Little foreclosure relief seen from housing bill

A weakening economy, along with rising prices for food, energy and other household expenses, has expanded the pool of homeowners at risk of default. Some who might otherwise be able to keep up with their payments are falling behind as job loss or major health expense depletes their savings or retirement funds.

“The crisis is not getting better, the crisis is getting more severe,” said Susan Keating, the president of the National Foundation for Credit Counseling, which works with local agencies helping cash-strapped families. “And the tentacles of the problems are much more far-reaching than any of us would have considered 18 months ago.”

While the initial rounds of mortgage defaults and foreclosures were concentrated on the lower end of the economic ladder, the problem is now hitting families with higher incomes. Gardner says he’s seeing a big increase in bankruptcy filings from wealthier clients.

“From predominantly hourly employees all the way up to doctors, lawyers, insurance agents, people that were involved in the banking mortgage and real estate business,” he said. “It’s just been a massive upward movement on the income scale.”

For some homeowners, no amount of government help will head off a foreclosure. That includes many in states with the highest concentrations of mortgage defaults, such as California, Florida, Arizona and Nevada. In those states up to 40 percent of buyers in recent years were buying the homes as investments, according to Wachovia economist Mark Vitner.

“These investors never thought they’d have to make any mortgage payments. They thought they’d flip it,” he said. “These investors have no money. They have nothing. They used credit cards to make the down payment.”

Other homeowners facing default simply bought more house than they could afford, sometimes based on the advice of a real estate agent or mortgage broker.

With so many different factors behind the rise in foreclosures, the extended debate over the housing bill has brought wide disagreement about appropriate solutions.

Opponents of government relief maintain that borrowers willingly took on debts they knew — or should have known — they couldn’t afford. But as state and federal investigators have brought thousands of cases of mortgage fraud in the past year, the role of mortgage brokers and lenders has gotten more attention.

Bernanke, in announcing new mortgage rules this week, said many borrowers had been victimized by "unfair or deceptive acts and practices by lenders."

Among other provisions, the new Fed regulations require mortgage brokers and lenders to verify that a borrower can afford the mortgage and fully understands the terms. The rules also bar lenders from locking home buyers into bad loans by applying unaffordable pre-payment penalties.

While much of the early debate on the housing bill centered on whether the government should “bail out” borrowers and lenders who got in trouble, the debate has shifted with the collapse of Bear Stearns in March and the problems faced by Fannie Mae and Freddie Mac

Critics of the two companies have long voiced concerns that, with a combined $5 trillion in mortgages and mortgage-backed bonds, Fannie Mae and Freddie Mac had grown too fast and hold too little capital to weather a severe downturn.

The White House's proposed reforms could help maintain a ready supply of affordable mortgage financing for future home buyers. But they won’t help those with existing loans who face default. Or their neighbors who are seeing their home’s value decline.

“It’s not going to speed up or lessen the impact of the correction of the housing market,” said Vitner. “It’s too late for that. There's nothing that can be done.”

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