Ninety-two percent of American homeowners are making their mortgage payments.
But many of them are struggling to do so. They are working two jobs, trimming their food budgets and putting off buying clothes for their children to keep a roof over their families' heads. They are proud, hard-working Americans who believe government help is a last resortand they are determined not to get there.
They are the backbone of the American economy. They are what make the American economy work. But they have their limits, too.
What are we saying to those families if we spend billions of their federal tax dollars to bail out the 8 percent of homeowners in foreclosure? Some of them have defaulted through no fault of their own and deserve help, but many more should never have been given a loan to begin with.
Let's compare two typical families in the two groups. Family A put 20 percent down on a house when the market was beginning to spike at 7 percent interest. Their neighbor, Family B, bought at the same time. They didn't have money for a down payment and may not even have had the income to qualify under accepted lending practices, but were given a loan anyway.
As housing prices continued to rise, Family B took out equity loans. They bought a boat. They bought a camper. Everyone in the family purchased new clothes. Family A lived within their means.
When the market turned, Family A lost the equity in their home, including their 20 percent down payment. Their home is now worth the cost of their loan, but they continue to make the mortgage payments hoping for better days. Family B's home is now worth far less than the original and equity loans. They have no stake in the housenever didso they've stopped making their mortgage payments.
Under what we now know of President Barack Obama's mortgage bailout proposal, Family B's loan would be restructured to the current value of the home and their interest rate cut. Family A would get no federal help. If you were Family A, wouldn't you look at Family B and wonder why you're continuing to scrimp and save to pay the mortgage?
I agree with Obama that the federal government has a role in helping those who have made a good-faith effort to make their payments. Family Band I believe a large majority of those in foreclosure todaydo not fit that category.
Lack of confidence
A major part of our economic crisis is due to a lack of confidence in our economic future. Therefore, we must be careful not to take away Family A's conviction they can make it or that they are not fools for doing so. When Family A looks at their neighbor who is getting federal assistance, they must believe the neighbor deserves it. They must look at the federal program and still believe the key to success is hard work and opportunity. This is important because, as I've said since this economic crisis began, one of the primary reasons for this crisis is the lax standards lending institutions have employed to determine who qualifies for home mortgages.
Banks and other lending institutions have been giving loans to people like Family B who don't qualify and cannot possibly pay back their loans. They have done so using gimmicks and sometimes through outright fraud, but more often under the lax regulations or nonsensical mandates imposed by the federal government. That includes giving loans to illegal immigrants with no discernible income.
Before we throw money at the problemor at least as we're doing itwe must tighten standards, regulations and laws that have allowed this to happen in the first place.
I called for tighter regulations when I twice voted against the Wall Street bailout. I said it when I voted against the Detroit bailout. I said it when I twice voted against the nonstimulus act.
In announcing his mortgage bailout plan last week, Obama said, "The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly" and "will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad." But I fear when we see the details March 4, the devil will be in them.
Any plan Congress approves must include legislation reversing a 1990s law that encouraged loans to everyone, regardless of their ability to repay the loan. New legislation must require lending institutions to collect and verify income documentation and require a sizable down payment.
Likewise, any current homeowners participating in the proposal must adhere to the language included in the Hope for Homeowners Program that went into effect in October: "The mortgagor shall provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt, and has not knowingly, or willfully and with actual knowledge, furnished material information known to be false for the purpose of obtaining any eligible mortgage."
Our economy will only be rebuilt on a solid foundation of economic principles that were ignored in the three most recent bailouts. It will only be rebuilt by restoring confidence in the homeowners who are scrimping and cutting back to make their mortgage payments. It will only be rebuilt if we are fair to those who still believe in the American dream.
I urge the president, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to take this opportunity to right the ship.