The Housing Chronicles Blog: Bailout still ignores all of those pesky vacant homes

Sunday, September 28, 2008

Bailout still ignores all of those pesky vacant homes

It's the empty houses, stupid.

So starts a blog post from the's "The Red Tape Chronicles" (no relation to this blog other than smartly selecting the generic term "Chronicles") on how the bailout of Wall Street mortgage junk still does nothing to address the problem of empty homes across the land. More from the blog post:

In case anyone has forgotten the core of the current economic crisis, here's a reminder: empty homes, both present and future. Empty homes are behind all the supposedly worthless mortgage-backed securities that no one wants to buy on Wall Street. Fear of the coming avalanche of empty homes -- what the Center for Responsible Lending calls the “tsunami of foreclosures” -- has made Wall Street’s mortgage-related paper nearly worthless.

It seems that filling those empty homes by dealing with foreclosures and stoking demand to buy homes should be the first order of business. So why -- as we discuss the most dramatic government intervention in nearly a century -- is there only passing mention of all these vacancies?

By every industry measure, foreclosure is a huge problem. Earlier this year, the financial services giant Credit Suisse estimated that there will be 6.5 million U.S. foreclosures during the next five years.

And even if you pay your mortgage on time, foreclosures will likely hurt you, too. Each time a family is kicked out of a home, there's collateral damage to the value of nearby homes. The Center for Responsible Lending says that the closest 50 homes lose an average of $3,000 in equity every time there’s a foreclosure. The organization estimates that 40 million families will lose nearly $350 billion in equity due to foreclosure collateral damage during the next five years...

There are really two related but distinct economic crises facing America right now. There’s the liquidity crisis on Wall Street, which has us all breathlessly watching CNBC, and there’s the housing crisis, which is kicking 6,000 families per day out of their homes and is draining equity from the rest of the nation’s homeowners...

“This was kind of a game of chicken and I'm afraid it looks like the consumer advocates in Congress are the ones who blinked ,” said Adam J. Levitin, a bankruptcy expert at the Georgetown University Law Center.

Details of the not-quite-completed-bailout-plan are still emerging, but by all accounts it will not include the most obvious and direct tool to stem the empty house problem: adjustments to bankruptcy law that would allow judges to modify the mortgages of at-risk homeowners.

Such assistance could still materialize in Congress, but the Senate voted to reject the idea in April, spurred on by agressive bank lobbying. By agreeing to this bailout deal without fixing bankruptcy law, Main Street’s advocates have surrendered nearly all their leverage...

"The only way to stop the free-fall of housing prices is to stop foreclosures," Kathleen Day, spokeswoman for the Center For Responsible Lending, warned. "If you don't do something for consumers, this is going to be unfair and ineffective."

The proposal to amend Chapter 13 bankruptcy law (the kind where debtors repay their loans, but buy time and get some discounts) is hardly revolutionary. Under Chapter 13, filers can rework all kinds of loans: car loans, vacation home loans, investment/rental property loans. But primary residence loans are exempt. Struggling homeowners face two choices in current bankruptcy law -- pay every penny or walk away. The limitation stems from a 1970s law that was intended to encourage banks to lend more money to would-be homeowners.

The simplest way to prevent the coming avalanche of additional empty homes -- and thereby make those asset-backed-securities have some real value -- is to prevent people from getting kicked out. It's stunning that $700 billion is about to change hands with no direct plan for keeping them in their homes.

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