TESTIMONY OF DR. CHRISTOPHER J. MAYER
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY
HEARING: “H.R. 200, THE ‘HELPING FAMILIES SAVE THEIR HOMES IN
BANKRUPTCY ACT OF 2009,’ AND H.R. 225, THE ‘EMERGENCY HOMEOWNERSHIP
AND EQUITY PROTECTION ACT’”
JANUARY 22, 2009
Accelerating declines in the housing market and growing foreclosures are placing a serious strain on American households and economy. While it is crucial to deal with the broader economic crisis through a comprehensive stimulus package and tax cuts, the economy is unlikely to recover without addressing the housing crisis directly. More than two-thirds of all American households own their own home. Most homeowners have relatively modest stock and pension holdings; the bulk of their wealth is tied up in their home. As house prices keep falling, these households suffer increasing wealth declines, making them more likely to further retrench and cut spending. As well, the increasingly dire problems in the banking sector are first and foremost tied to housing declines and mortgage losses.
The fall in the housing market has been stunning and unprecedented. House prices dropped about 18 percent in the last year according to Case and Shiller/S&P, likely the largest national decline in prices since the Great Depression. This has led to crisis of foreclosures, with 2.25 million foreclosures started last year (Federal Reserve)1 and the forecast of 1.7 million foreclosures started in 2009 (Credit Suisse Foreclosure Update)2. Foreclosures contribute to a further decline in house prices, deteriorating communities, and failing banks. Despite good intentions and appreciable effort, public policy to stem foreclosures has had limited success.
And the problem will likely get worse without prompt action. As of September 2008, there were more than 2.2 million vacant homes, 4 million vacant rental properties, and 4.5 million houses on the market, unsold. If we do not reduce this inventory, house prices will keep falling. The likelihood of growing foreclosures looks equally bleak. As of October 2008, sixty- day delinquency rates exceeded thirty-three percent among the 2.8 million outstanding securitized subprime loans and seventeen percent among the 2.2 million securitized alt-A loans. Even worse, many securitized option ARMs will hit negative amortization limits between 2009 and 2011, resulting in rising payments and higher default rates.
I believe we must address the foreclosure crisis immediately for economic and humanitarian reasons. As I will address below, amending the Bankruptcy Code to permit cramdown of first mortgages would generate serious risks and many unintended consequences. Instead, I propose an immediate solution that would appreciably alleviate the current foreclosure crisis more quickly and at a reasonable cost. My solution involves three plans that would encourage as many as a million additional successful mortgage modifications, help remove second liens as a barrier to loan modification and refinancing, and put a floor on house price declines and save tens of millions of homeowners an average of $450 per month, every month. These plans in total would cost taxpayers around $12.8 billion and start to turn the crisis around.
It is crucial to address the foreclosure crisis in a manner that yields quick results and does not bankrupt taxpayers and our financial system. While proponents of bankruptcy reform tout the fact that it will not cost taxpayers any money, as I show below, this claim is not true. Taxpayers are at risk for trillions of dollars in mortgage guarantees from Fannie Mae, Freddie Mac and the FHA that could be extremely costly if mortgage cramdowns are allowed. In addition, taxpayers have sunk hundreds of billions in the banking system, a cost that would also rise with cramdowns. The Obama administration has promised to spend between $50 billion and $100 billion reducing foreclosures as part of the second $350 billion that was authorized under TARP. So the government has already committed a large sum of money to reduce foreclosures. Bankruptcy reform is not only unnecessary, but it would delay the process of stopping unnecessary foreclosures.Testimony source: House of Congress