The crisis of working class family debt

There is broad consensus among labor unions and progressive organizations, economists and politicians that we need a bottom-up solution to the economic crisis. That is, the priority should be fixing Main Street, not Wall Street. The main immediate proposals include:

1) A moratorium on home foreclosures, and giving bankruptcy courts the power to renegotiate mortgages.

2) Extend unemployment benefits and increase funding for food stamps, heating assistance, and other survival programs for the duration of this economic depression.

3) Aid to state and local governments so they can avoid layoffs and reductions in vital services.

4) Rebuilding the infrastructure of America: clean energy, roads, bridges, water systems, schools, and housing, providing good-paying jobs.

5) Increase the minimum wage to a real living wage based upon the calculations of the United States Department of Labor and its Bureau of Labor Statistics with the minimum wage legislatively mandated to be continually adjusted based upon all--- and real--- cost of living factors.

6) Forgive student loan debts.

7) Forgive all health care related debt and implement socialized health care.

8) Save jobs through public ownership of closing plants and nationalization of failed industries. What tax-payers finance, tax-payers should own.

9) Drastically slash the military budget and reorder priorities to meet human needs. The military-financial-industrial complex has robbed society of the resources needed to create a decent quality of life for all people.

Bailing out Wall Street without fixing Main Street is like fixing the cracks in the wall while your foundation is crumbling. The measures listed above, as well as more basic changes, are necessary. But with more than 100,000 families losing their homes each month, I would like to focus on one critical part of the foundation -- stopping foreclosures and keeping families in their homes.

The root of the crisis is that working families have been squeezed from all sides, especially since the recession of 2001. Household income has been falling behind the increasing cost of necessities. The squeeze has been aggravated by the decline of medical coverage and retirement plans, shifting these costs, along with soaring costs for education, food and energy, onto over-strained family budgets.

Many have dealt with this strain by going into debt. They were pushed deeper by the mortgage brokers, real estate agents, appraisers, and credit card vendors, who piled on fees, charges, and hidden interest rates, often based on wildly inflated housing prices. Even when this debt was not the result of outright fraud and conspiracy by the financial and real estate industries, it was in violation of any reasonable banking standards. Financial institutions, staffed by MBAs, PhDs and other highly-trained experts, made loans that no first-year economics student should have approved.

The immediate cause of the financial crisis on Wall Street is this mountain of debt smothering people on Main Street. In simplified form, here is what happens.

● Hard-pressed families fall behind on their mortgage and credit card payments.

● When homeowners can't make payments, the banks foreclose, but the home frequently stands empty and the bank is unable to recover much of the outstanding loan.

● The bank, with less money coming in, has trouble paying other banks and investors that it borrowed money from.

● Those other banks and investors have trouble paying banks and investors they borrowed from.

● Banks, investors, and ordinary businesses are afraid to lend money to other banks, investors and ordinary businesses.

Families owe more on their mortgages and their credit cards than they can ever pay back. Add to this the incredible massive student loan debt and unpaid medical bills. And their effort to save their homes and meet creditors' demands is undermining their families, their neighborhoods and the local economy, as family members work multiple jobs and cut back on health care, local purchases, local taxes, utilities, and home maintenance while the robbery at the pumps continues and every trip to the grocery store finds rising prices.

The bailout package just approved by Congress doesn't address this problem at all. Homeowners and consumers still have the same debt, still face the same monthly payments. The only change is that the U.S. government has become a collection agent for the banks and investors.

The solution is to reduce the amount that working people owe. Reduce homeowners' and consumers' debt to the level it would be at if reasonable lending standards had been applied in the first place. Conservative practice is that families should pay no more than 25 percent of their income for housing. So a people's bailout plan would mandate that mortgages be reduced so that monthly payments will be 25 percent of household income. But in no case should the debt be for more than the real value of the house, as determined by historical price levels adjusted for inflation. Credit card debt, second mortgages, and home improvement loans, college loans, and medical debt could also be adjusted by similar calculations, to a maximum of 10 percent of household income.

This would not cost the government a penny -- it would force banks and investors to recognize the losses resulting from their own bad judgment and fraudulent practices. Millions of people would still be in their homes, and neighborhoods and local tax bases would be stabilized. And the financial system would be more stable because the banks could now be confident of receiving a steady stream of payments, even though these payments would be less than what they originally expected.

The proposals to revive the economy, listed at the beginning of this article, should still be adopted. The economic stimulus package that was blocked in the Senate by a Republican filibuster a few weeks ago included some of those provisions. And major reform and regulation of the financial industry is necessary; there are some excellent proposals to take over failing banks, regulate the financial industry, and tax financial transactions and exorbitant compensation to control speculation and help pay for the program. But until we clear up the massive, unfair, and often illegal debt that has been fastened on working families, it will act as an anchor dragging down the economy, and Main Street will be haunted by insecurity and misery.

Democratic leaders in Congress had a number of proposals that would have reduced the amount families owe on their mortgages. They were blocked by the Republicans, who don't support any meaningful relief for homeowners.

During the vice presidential debate, Senator Biden expressed support for bankruptcy reform to reduce the amount owed by homeowners, and said that he thought that McCain opposed it. Governor Palin said that Biden was wrong, implying that McCain also supports the measure, and said that McCain is on the side of the people against “the greed and corruption on Wall Street.”

There is a simple test to see if Palin's claim has any substance. Will McCain show leadership and bipartisanship by proposing that Senators Obama and Biden join him in pushing to pass this bankruptcy legislation immediately? The proposal was killed in the Senate last April after encountering “stiff opposition from many Republicans as well as the banking and mortgage loan industries,” according to the New York Times. (April 4, 2008) But with McCain's backing, there should be no problem getting this legislation through Congress now.

Wall Street bankers, financiers and industrialist profited; the working class has been left with the misery and the problems.

Write Barack Obama; tell him you support this:

http://change.gov/page/s/contact

Other suggestions:

* Print and Post this on bulletin boards in union halls, community centers, schools, churches on refrigerators.

* Give a copy to your friends and neighbors.

* Talk to local, state and federal public officials.

* Organize demonstrations and picket lines to call attention to the problem and the solution.

* Write letters to the editor of your local newspaper, newsletters, and post a link to this on your blog or web site.

* We need to begin building grassroots and rank-and-file committees and organizations in every neighborhood, school and place of employment to begin putting together a massive all-people's united front type coalition so we have the strength and the power to stand up to these Wall Street parasites and vultures.

People Before Profits!

Please distribute this widely.

Other woes makes foreclosure crisis hard to break

Oct 26, 2:18 PM (ET)

By ALAN ZIBEL


WASHINGTON (AP) - Each day from July through September, more than 2,700 Americans lost their homes in foreclosure.

That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.

The mortgage market's troubles have proved to be far more serious and intractable than most in government or the private sector had predicted a year ago.

"We are behind the curve. We are falling behind," Sheila Bair, head of the Federal Deposit Insurance Corp. told a Senate hearing Thursday. "There has been some progress, but it's not been enough, and we need to act. And we need to act quickly, and we need to act dramatically to have more wide-scale, systematic (loan) modifications...."

More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.

So why is the foreclosure crisis so hard to fix?

There are five main reasons:

- Crashing home prices:

A massive speculative bubble in housing prices caused millions of Americans to think of their homes as an investment, rather than a place to live.

Now prices are plummeting, especially in once-sizzling markets like California, Florida and Nevada. And the bleeding might not stop until the end of next year.

The median home price in the U.S. dropped 9 percent in September from a year ago to $191,600, and is down 17 percent from the peak in July 2006, the National Association of Realtors said Friday.

Already, 23 percent of homeowners with a mortgage owe more on their loans than their homes are worth, and that figure is expected to rise to 28 percent by this time next year, according to Moody's Economy.com.

While the majority of homeowners will continue to make their payments and wait for values to recover, some will mail their keys to their lender and walk away, leaving the lender with no choice but to foreclose.

Sophie Lapointe, a mortgage broker and owner of Five Star Mortgage in Las Vegas, has found there's little that can be done to help people who owe more than their homes are worth. "The biggest problem is negative equity," she said.

When homeowners in that position ask her about refinancing, Lapointe tells them to contact their current lender and ask about a loan modification because she already knows no new lender will give them a loan.

Loan modifications vary depending on many conditions, but can include deferring payments, allowing partial payments, lowering the interest rate and lowering the principal balance.

- Investor speculation:

Plunging prices have had even more impact on investors than on homeowners because investors have less emotional attachment to a house. They're even more likely to walk away, especially if they've put little money into a property.

Investors purchased one of every five homes last year, and almost one of every three when the market peaked in 2005, according to the Realtors trade group.

They flocked to hot markets like California, Florida, Nevada and Arizona, as television shows such as A&E's popular reality series "Flip This House" touted the easy money that could be made buying and selling homes.

They took advantage of risky loan products that didn't require down payments or proof of income. Other loans allowed the borrower to pay only the interest on the loan, or even less, and none of the principal for a certain time.

Now, more than 30 percent of properties in the foreclosure process are owned by someone with a different address, indicating the home is likely owned by an investor, according to foreclosure listing service RealtyTrac Inc.

Government programs to help homeowners are specifically designed not to help such investors, though in reality it may be hard to weed them out.

- Complex investments:

Traditionally, lenders evaluated borrowers carefully because they held onto the mortgages for the life of the loan. That process started to change in the late 1980s, as Wall Street found new ways to package the loans into securities to sell to investors.

Investors were attracted to these new mortgage-backed securities because they paid better returns than government bonds.

At the beginning of this decade, the Federal Reserve started cutting interest rates to historic lows. So investors poured money into the U.S. mortgage market, particularly into securities made up of high-interest mortgages made to borrowers with poor credit records.

The high-interest, risky mortgages, called "subprime," boomed, from $160 billion in new loans in 2001 to more than $600 billion in both 2005 and 2006, according to Inside Mortgage Finance, a trade publication.

Lenders stopped worrying about the creditworthiness of borrowers and offered them ever-riskier mortgages. Most of those loans were made by commission-driven mortgage brokers, who had nothing to lose if the mortgage went bad because it had been resold.

"By the time it defaults, it's somebody else's headache," said Barry Ritholtz, CEO of research firm FusionIQ.

When mortgages are packaged into securities, borrowers' monthly payments are divided up and sent to thousands of investors around the world. With so many owners, helping troubled borrowers is tougher. Many of these investors have been reluctant to agree to drastic loan modifications, such as reducing the principal balance, because they don't want to take a big loss.

"We and others have gone to these investors, and they're just not having it," said Evan Wagner, spokesman for Pasadena, Calif.-based IndyMac Federal Bank, which has been run by the FDIC since July. "They don't want to take more losses than they have to." Without such modifications, many homeowners can't avoid foreclosure.

Democrats on Capitol Hill are frustrated.

On Friday, six House Democrats, including Rep. Barney Frank, D-Mass., accused hedge fund investors in a letter of blocking loan modifications and called them to a hearing on the issue next month.

"For the hedge fund industry, which has flourished for much of the past decade, to take steps so actively in opposition to what is currently in the national economic interest is deeply troubling," they wrote.

- Job losses:

The No. 1 reason people fall behind on their mortgage is loss of a job, or some source of income, perhaps from a divorce or death of a spouse. If a borrower is unemployed, lenders don't have many options but foreclosure.

Two years ago, about 36 percent of mortgage delinquencies were caused by loss of income or unemployment, according to research by mortgage finance company Freddie Mac. (FRE) (FRE) But that number has risen to 45 percent this year as the unemployment rate has ticked up to a five-year high of 6.1 percent.

Jon Falen, 33, put his four-bedroom house in Olathe, Kan., with high-end appliances, granite kitchen countertops and a landscaped lot, on the market more than two years ago after health problems forced him to leave his job as an air traffic controller.

Falen and his wife, now delinquent on their two home loans, are finally scheduled to sell their house next month.

But there's a big catch: The buyer has agreed to pay only $490,000, which is $70,000 less than what the couple paid for it in 2002.

Making matters worse, Falen and his wife owe $675,000 to two lenders because they used their home equity - which soared during the housing boom - to pay off student loans and remodeling expenses.

Though Falen and his family seem to have avoided becoming another foreclosure statistic by cashing out on retirement plans and dipping deeply into savings, he is chastened by the drawn-out experience.

"Any debt right now scares me to death," he said.

- Falling behind again:

It's hard to fix something that keeps breaking. Roughly one-third of all subprime loans modified in the third quarter of last year were delinquent again within 10 months, according to a Credit Suisse (CRP) report released this month.

Maria Martinez, 57, an administrative worker at the county jail in Stockton, Calif., is typical of homeowners who have gotten help, but not enough. She is three months behind on her mortgage, even after receiving a loan modification earlier this year.

Though Martinez bought the house more than a decade ago for only $76,000, she now owes about $230,000 because she refinanced her home loan several times.

"I was trying to borrow some money to pay some bills," said Martinez, who is on leave from her job this month after being diagnosed with cancer. "I didn't really think...that I would get into a bind like this."

Until the summer, she was paying an interest rate of about 8.5 percent on her mortgage. The modification lowered that amount to 7.75 percent.

If she had been given a more generous loan modification, she might be in a better situation. But most efforts to help homeowners have been slow and weak.

- So what has and should be done?

The scale of the mortgage crisis became clear in July 2007 when Countrywide Financial, then the nation's largest mortgage lender, reported an unexpected surge in defaults in high-quality mortgages.

Three months later, the Bush administration announced a new mortgage industry coalition - dubbed the Hope Now alliance. The coalition had an "aggressive plan to reach more homeowners and help them find a way to stay in their homes," Treasury Secretary Henry Paulson said at the time.

The Hope Now group says the industry has modified 765,000 loans since last July, and put 1.5 million borrowers on temporary repayment plans. There are no data on how many of those homeowners have fallen behind again.

Faith Schwartz, the coalition's executive director, said the effort was never meant to be the only solution to the foreclosure crisis. She says there "has been a tremendous effort" on the industry's part, noting that 1.9 million households have received letters urging them to call a housing counselor.

Industry and government responses have also drawn fire from consumer advocates for being too slow and too narrow.

The Federal Housing Administration, a government agency that backs loans to borrowers with weak credit, says it has helped about 400,000 borrowers refinance over the past year, though only about 1 percent were behind on their loans.

This month, the FHA started the "Hope for Homeowners" program, included in legislation passed over the summer by Congress. It is designed to let another 400,000 troubled homeowners swap their mortgages for traditional 30-year fixed rate mortgages , but only if lenders agree to reduce the value of a loan and take a loss.

But there are still questions about how eager lenders will be to participate.

Faced with public outrage that they passed a $700 billion plan to rescue the financial industry, politicians in Washington are going to keep trying to find ways to fix the foreclosure crisis. One promising approach came this month when 11 states entered into a more than $8 billion settlement with Countrywide Financial and its new parent Bank of America Corp. (BAC) (BAC)

The settlement, which goes into effect Dec. 1. is projected to help an estimated 400,000 Countrywide borrowers by allowing them to replace risky loans with ones at substantially lower interest rates.

And in Washington, the FDIC's Bair has proposed a plan in which the government would provide guarantees for mortgages that have been reworked by banks, lowering payments to more affordable levels.

All eyes now are on Bair, Paulson and other top officials to see if the government can craft a plan that gets at the heart of the global financial meltdown - the U.S. foreclosure crisis.

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AP Business Writer Daniel Wagner contributed to this report.