TheLoop21.com

By: Darrell Williams (Add to your loop)
Wed, 10/08/2008 - 00:00

The bailout should help homeowners.

(Read more of our stories about the Covenant with Black America.)

Last Friday, Wall Street got its bailout — a $700 billion plan to relieve financial institutions of "toxic debt." But what about homeowners, working folks, who have their own "toxic debt," shouldn't the government assist them, too?

That question is really two questions. First, do homeowners need help? Second, would there likely be any benefit to the economy that would justify government intervention? The answer to both questions is yes. 

Homeowners need help

Roughly 20 percent of all new mortgage loans in 2005 and 2006 were subprime mortgage loans.  Amazingly, nearly every subprime loan made during that time was an adjustable rate mortgage, not the traditional fixed-rate mortgage that has financed housing growth since World War II. As has become painfully obvious by now, the outlook for many of these homeowners— the people who took out these loans— is grim, as they face the prospect of higher mortgage payments as their mortgage interest rates adjust upward.

Helping homeowners can help financial institutions

Foreclosures hurt everyone. They hurt the neighborhoods where foreclosed property is located, because they lower home values and make it harder for struggling homeowners to refinance. They hurt financial institutions, because the value of mortgage-backed securities is based on the mortgage payments actually being made. When government intervention is needed, as it is now, foreclosures hurt taxpayers by increasing the risk that additional tax dollars will be needed to avert a complete meltdown in the financial sector.

Therefore, providing direct assistance to homeowners that will help them avoid foreclosure not only helps individual homeowners, it goes a long way to improving the financial stability of a wavering United States economy.

A bailout plan for homeowners

Several bailout assistance plans for homeowners have been suggested. They all generally include the following:

    •    Government Subsidized Refinancing:  Allow homeowners to refinance their existing adjustable-rate mortgages at some fixed rate, say 6 percent for a 30-year mortgage. The government would pay for this out of tax dollars.  The advantage is that it would stem the tide of foreclosures by making mortgage payments affordable.
    •    Adjust Home Prices to Market Value: Many homeowners currently owe more on their homes than the house is worth. Somehow, the government would have to make up the difference. One proposal is for the government to create a new agency that would own these mortgages.
    •    Eligibility: The primary residence of every homeowner would be eligible. Limiting eligibility for the plan to primary residences avoids concerns about rewarding people who were speculating in the market by buying and "flipping" multiple properties.

Unlike financial institutions, homeowners' "toxic debt" was, in many cases, thrust upon them by predatory lenders. Crafting a bailout for homeowners would not only be fair, it would help buttress an ailing economy.

Check out some other stories on the credit crisis:

Black communities hit hard by the financial crisis

Business stories feel the economic pain

Opinion: Blaming minorities for the credit crisis

Minority-owned banks fare well .