the economy, increase property values, and boost consumer confidence.”
Citigroup’s efforts represent a new trend that banks and debtors are utilizing to assist homeowners who have over leveraged their income. Based on Paulsen’s statement Wednesday, this may be a trend that the government might reward.
“Although the details of any regulatory reform and bailout have not been spelled out, the philosophical underpinnings are clear: Any further government help to specific industries or firms from the government will require concessions by those industries or firms via greater regulation or givebacks,” says Samuel Myers, an economics professor at the University of Minnesota. “In the case of lending, I think anticipation will be immediate support for homeowners via freezing of foreclosures and delayed payments or repackaged loans.”
Myers believes that blacks will benefit from modified mortgages and debt assistance programs more so than the general population, since they were disproportionately targeted by subprime lenders. The growth of the higher-priced subprime loans is believed to have contributed greatly to an increase in mortgage defaults and foreclosures. According to the Home Mortgage Disclosure Act Data, black people had the highest average spread on subprime rate loans in 2005 and 2006.
The practice of banks helping homeowners is not new and is often undertaken on a case-by-case basis, explains Myers. “The problem is that African Americans rarely have been offered these options to foreclosure. What is new is that by making the practice uniform, African Americans will disproportionately benefit,” he says. “Interestingly, it will also narrow the disparity in lending outcomes. This is one instance when good economic policy also has the advantage of being fair and equitable.”