President Obama's latest housing proposal is a welcome change but won't come close to solving the nation's foreclosure crisis, California's House Democrats warned Wednesday.
The lawmakers want Obama to bypass Congress and empower bankruptcy judges to reduce mortgage principal to keep folks in their homes. Their push represents the strongest resurgence of the Democrats' "cramdown" concept since the Senate killed a similar proposal several years ago.
Obama on Tuesday outlined a plan to allow millions of underwater homeowners — those who owe more on their homes than their houses are worth — to refinance at historically low interest rates. The president said his proposal would save "responsible" homeowners about $3,000 each year.
"Responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief," Obama said during his annual State of the Union address. "No more red tape. No more runaround from the banks."
The Democrats applauded that plan Wednesday, but cautioned that it won't stop millions of homeowners from losing their single biggest asset.
"This is certainly good," said Rep. Mike Thompson (D-Calif.), "but it's not good enough to deal with this problem; it's not good enough to keep people in their homes; it's not good enough to address the needs that we're hearing communities crying out for. We need to be able to reduce the principal."
The Democrats noted another obstacle to the president's refinancing plan: because it's in the form of legislation, it will require Republican backing to take effect.
"We understand that the [GOP] majority is not interested in passing bills of this nature," Rep. Anna Eshoo (D-Calif.) said Wednesday.
Rep. Darrell Issa (R-Calif.), chairman of the House Oversight and Government Reform Committee, said this week that he's open to some new housing reforms, endorsing the notion that Congress should "find creative ways to get the housing market going again in a stable but positive way."
"It's well within the government [authority] to say, 'You still have to pay your whole amount — you owe it — but we're willing to have you get the current [interest] rate, which today would lower mortgages, it would make homes more affordable, and it doesn't require some shirking of the original agreement," Issa told The Hill Tuesday.
Still, the Democrats aren't holding their breath for GOP cooperation, instead pushing Obama to act on his own. They're offering several several alternatives to the president's refinancing plan.
One scenario — known as principal pay-down — would allow underwater homeowners who file for Chapter 13 bankruptcy to skip interest payments for five years, instead directing the entirety of their checks toward the principal balance.
Another proposal — dubbed principal forgiveness — would let bankruptcy judges reduce, or “cram down,” principal balances outright — a power judges currently have over loans for vacation homes, yachts and other assets, but not for primary mortgages.
The Democrats argue that the administration can make the changes unilaterally, either through the Federal Housing Finance Agency (FHFA) or as a condition of a multi-state settlement currently being finalized between the Justice Department, mortgage servicers and state attorneys general.
"The president has a 'We can't wait' agenda," Rep. Zoe Lofgren (D-Calif.) said Wednesday. "We're asking [him] to use the authority that he has to obtain the principal-reduction plan that we have urged. He has the authority. Let's use it."
The Democrats' drive hit a wall, however, when leaders at the FHFA — an independent agency that oversees Fannie Mae and Freddie Mac — rejected both the principal forgiveness and principal pay-down proposals.
The first, acting FHFA Director Edward DeMarco wrote recently, would cost taxpayers $100 billion and require congressional approval. The second, DeMarco said in a separate letter, wouldn't benefit enough homeowners to make it worthwhile.
"Less than ten percent of borrowers with [Freddie and Fannie] loans have negative equity in their homes," DeMarco wrote last week to Lofgren. "Even if underwater borrowers are disproportionately represented in bankruptcy, the total number of borrowers who could be helped by this proposal is likely to be small relative to the overall population of delinquent borrowers."
The FHFA responses, which came almost three months after House Democrats met with DeMarco to pitch their ideas, only amplified the lawmakers' previous calls for Obama to remove DeMarco and name a permanent replacement.
"We need people who are committed to making a significant difference," Rep. Dennis Cardoza (D-Calif.) said Wednesday. "Anyone who understands the problem, would understand that he [DeMarco] doesn't get it."
The Democrats have also met to discuss the foreclosure crisis with other high-ranking members of the administration, including Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun DonovanShaun DonovanHouse Dems call on OMB to analyze Senate budget plan Overnight Finance: Dems turn up heat on Wells Fargo | New rules for prepaid cards | Justices dig into insider trading law GOP reps warn Obama against quickly finalizing tax rules MORE.
Miller said the Democrats left those meetings "with no satisfaction that they fully understand the magnitude of this problem." More recently, the lawmakers have asked to meet Obama directly.
The White House defended its housing record, saying Obama has been fighting to stabilize the volatile market "from day one" with a series of loan refinancing and modification efforts.
The 2009 Home Affordable Modification Program (HAMP), for instance, authorized billions of dollars in incentives to banks to make mortgages more affordable. As of November, almost 910,000 had benefited from a permanent modification under the program, according to the Treasury Department.
"The President will continue to expand on these efforts and look at new ways to help homeowners," White House spokesman Adam Abrams said Wednesday in an email, "just as he has over the past few months with new programs to help underwater homeowners and expanding forbearance so more unemployed homeowners can stay in their homes."
Housing advocates, including the California Democrats, say the voluntary nature of those programs has made them largely ineffective in the face of the millions of homes that are underwater and facing foreclosure.
The White House declined to comment on whether Obama intends to meet with the Democrats.
Fueling the Democrats' concerns, California has been hit harder by the foreclosure crisis than almost any other state, with one in every 254 housing units in some stage of foreclosure last month — the second highest rate in the country, according to RealtyTrac, an online foreclosure tracker. The national rate, by contrast, was one in every 634 properties.
"If we don't do something now, we'll continue to have a depressed economy," said Rep. Judy Chu (D-Calif.).
Obama has been a long-time advocate of reforming bankruptcy law to benefit struggling homeowners.
“I will change our bankruptcy laws to make it easier for families to stay in their homes,” Obama said during a campaign stop in Colorado in September 2008.
Yet when such a proposal came up in the Senate seven months later, the president all but abandoned his support, making no public statements prior to the vote and applying no pressure to on-the-fence Democrats to back the proposal.
The proposal failed 45 to 51 — 15 votes shy of defeating the GOP filibuster — with 12 Democrats joining every Republican to kill the bill.