The Star-Ledger

A U.S. Senate Vote For Foreclosures

The Star-Ledger — Thursday, May 7, 2009

The Star-Ledger Editorial Board

The U.S. Senate had to choose last week between a banking industry Washington has spent billions to bail out and hard-pressed homeowners seeking a helping hand from some of these same banks.

It opted for the banks, rejecting a measure to let bankruptcy judges rework the mortgages of distressed homeowners trying to hold onto primary residences.

The proposed legislation, passed by the House and backed by the Obama administration, would have allowed bankruptcy judges to reduce the principal on a homeowner's mortgage, as well as cut interest rates and extend terms — provisions known as "cramdowns."

The bill was rejected 45-to-51 after a dozen or so financial groups opposed the legislation, which was designed to keep 1.7 million homeowners in their homes. Banking industry officials were joined by many Republicans in arguing that the bill would drive up interest rates in an already unstable housing market.

Defeat of the measure is regrettable. U.S. foreclosure filings rose to a record last month as jobs dried up and temporary programs to delay actions on defaults came to an end, according Realty Trac, a foreclosure listing service. A total of 803,489 properties nationwide received a default or auction notice or were seized, 24 percent more than a year earlier, according to the company's data.

A record 19 million homes stood empty at the end of 2008. The reality is that voluntary efforts by lenders to modify bad loans have not been enough to slow the pace of foreclosures.

Even if lenders do agree to modify loan payments, many Americans will still be in trouble because nearly 14 million homeowners are "underwater" — meaning they owe more on their mortgages than their homes are worth. New Jersey Citizen Action, a statewide watchdog group that provides home-ownership counseling, says unless banks begin to reduce principal, about 40 percent of homeowners they serve could lose their homes.

It seems absurd that bankruptcy courts can modify loans for boats and vacation homes but not primary residences. With foreclosures still on the rise nationally, these underwater homes will continue to be a drag on the overall economy and depress property values everywhere.

The banks bear huge responsibility for the current financial crisis. They need to be part of the solution. Ultimately, financial institutions, too, will pay the price for the lack of bankruptcy reform — and this discouraging foreclosure trend will continue.

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