U.S. State and local governments could in turn use funds for counseling and refinancing to help homeowners avoid foreclosure, Clinton suggested. The funds also could be used to purchase foreclosed or distressed properties that cities and states could then resell these homes to low-income families or convert the real estate into affordable rental housing.
Part Four: Lawsuit protection. Finally, Clinton announced that sheâ€™ll introduce legislation to shield mortgage companies from lawsuits. She contends that existing mortgages could be restructured, but lenders are reluctant to act because theyâ€™re afraid of being sued by the investors who actually own the mortgages.
Sounds good but just how viable is the Clinton housing plan?
“Until people have a better idea of how bad the housing slump will be and how many foreclosures there will be, banks and other financial institutions will be scared to lend money,” says Lance Freeman, an associate professor at Columbia University and noted housing expert. “Ideally some type of program to help distressed borrowers would be put in place sooner rather than later. The sooner such a program is put in place, the sooner the foreclosure problem can be resolved, and the sooner the credit crisis will ease.
Freeman adds that aiding distressed homeowners would ease the suffering of many households and help economy get back on track. “A moratorium without a quick initiative to help homeowners would only delay the day of reckoning,” he says.
On the other hand, Freeman is less enthusiastic about Clintonâ€™s proposed moratorium on foreclosures. “The sooner the housing market corrects itself, with or without additional government intervention, the sooner the credit crisis will end,” he says. “A moratorium would only delay the day of reckoning.”
Thomas Boston, Ph.D., a member of the BE Board of Economists, likes Clintonâ€™s plan because it shifts emphasis towards giving relief to homeowners with sub-prime mortgages, rather than just bailing out banks that hold these mortgages. “If financial institutions want to be bailed out by the government, they should also be subjected to more stringent regulations in the future,” adds the CEO of EuQuant, a research firm in Atlanta.
However, Boston doesnâ€™t agree with the senatorâ€™s proposal to freeze interest rates on subprime loans over five years. “This strategy could have devastating effects on financial markets,” he says.
“Freezing one set of interest rates in the economy while the others are free to fluctuate (could) cause financial chaos. The result would be like freezing gasoline prices in New Jersey while prices in New York remain flexible,” he explains. “Gasoline users in New Jersey would be happy but New Jersey suppliers would stop servicing the market and run instead to New York, where they can earn more money.”