Among other things, the Foreclosure Prevention Act sponsored by Senate Majority Leader Harry Reid (D-Nevada) would remove a long-standing provision in bankruptcy law and allow judges to reduce the amount borrowers owe on their homes. The bill would also allow states to issue refinancing bonds for homeowners with sub-prime loans. But the Congressional Budget Office has warned that such a change could result in higher interest rates for homeowners and bigger caseloads in bankruptcy courts.
Ronald Utt, a senior research fellow at the Heritage Foundation, says the foreclosure bill provides a new lucrative form of business for the legal profession and will hurt potential middle-income homebuyers in the long run.
"If risky borrowers that a lender is willing to take a risk on can then run to a court and get some sort of relief when they believe they can't make the mortgage payment, then lenders are going to respond by not making mortgage loans to those people," he warns. And that, says Utt, would be tantamount to "[going] back to the way things were 20 years ago when, sure, anybody could get a mortgage -- as long as they could [afford] a 20 percent down payment."
Utt says it is wrong for the government to provide huge benefits -- at the expense of lenders and investors -- to people who "bit off more than they can chew" or were financially irresponsible. He also maintains that pushing such a bill will falsely lead people to believe that home ownership is a right.
"It kind of continues ... or maybe even accelerates that trend that home ownership is something you're entitled to, not something that you have to earn," he suggests. "And it began even with this administration four or five years ago when they implemented federally supported, no-down-payment FHA mortgages. I mean, why bother having to save money for a house? Why bother to have a nest egg when we can make all that happen through a federal program?"
A cloture vote on Reid's bill has been postponed to allow for debate on an Iraq withdrawal resolution sponsored by Senator Russ Feingold (D-Wisconsin).