According To Critics The Bailout Offers Little Help For Homeowners

By Christopher Solomon, MSN Real Estate

The financial rescue plan approved by Congress and signed into law by President Bush aims to prop up Wall Street but may not do much for Main Street.

The historic $700 billion bailout of the American financial services industry signed into law Friday provides few solid assurances of help to struggling U.S. homeowners, housing observers and advocates agreed.

"We feel that this bill does nothing for homeowners," says Kathleen Day, spokeswoman for the Center for Responsible Lending, a nonprofit research and advocacy group. "This is what homeowners will get out of this bill: higher taxes and a continued erosion of home values because this bill does nothing to address the root cause of this problem, which is falling home prices, and they're being caused by the unprecedented tidal wave of foreclosures.

"It's a bailout for Wall Street." Bill Apgar, senior scholar at the Joint Center for Housing Studies at Harvard University, mostly agrees. "Other than trying to stave off the worst recession in 50 years, there's no help for homeowners" here.

Vague language

After the initial bill failed, a new version of the rescue package, with several additions, was passed by the Senate Wednesday and was approved by the House Friday morning.

The law directs the Treasury Department to "maximize assistance for homeowners." But Brenda Muñiz, legislative director of the Association of Community Organizations for Reform Now, or Acorn, was disappointed by the vagueness of such language.

"I think more could have been spelled out in terms of forcing the hand of these financial institutions" to make them assist homeowners, Muñiz says. Treasury Secretary Henry Paulson might be able to use the bill to facilitate loan modifications for homeowners who are in financial straits, she says, "but it also allows for a very passive response. (It) doesn't really have a lot of teeth to it."

Trying to make lenders voluntarily help homeowners with loan modifications won't work, for several reasons, Day says. Those reasons are as varied as the fact that the troubled mortgages are bundled in securities and owned by many different entities to the fact that there are about 6.5 million loans that need modification, Day says. "They don't have the manpower to modify these loans," she says.

A bright spot?

Muñiz says she saw a potential bright spot in an overlooked, one-sentence provision in the 451-page law that permits the Treasury Department to provide credit guarantees and enhancements on entire loans. It reads, "In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures."

According to an article published Friday in American Banker, this means, at least in theory, that the Treasury could guarantee certain types of loans in exchange for lenders first making loan modifications.

A tool like this won't solve the underlying problem, says Acorn's Muñiz, but she's anxious to see how far the Treasury will go to help homeowners. "Again, the question is, will the Treasury use all the tools at its disposal?" she asks.

No bankruptcy reform

One of the biggest concerns of observers and homeowner advocates was about a provision that was left on the cutting-room floor. "We wanted a change to the bankruptcy laws," Day says. Today, when a person faces foreclosure "a judge can modify a mortgage on a vacation home, a luxury home, a yacht – but they cannot modify the mortgage on a primary residence." That's ridiculous, she says.

Language to modify this was cut as the bill changed over the past week, Muñiz says. "That would've been one big provision that would've provided some real relief."

Apgar, of the Joint Center for Housing Studies, points out that many of the “no” votes on the Republican side were because the bill was already festooned with $110 billion in tax breaks. Asking the bill to do even more, right now, would have invited another defeat.

"Congress is in triage mode," he says. "I think we move through this and live to advocate another day for additional things that need to happen."