Suze Orman Money Matters

The recent action out of Capitol Hill should be filed under "thanks for practically nothing" as far as mortgage-stressed homeowners are concerned. In early April, the Senate pushed through a stripped-down bill that went out of its way to help homebuilders more than homeowners.

A Bankrupt Bill

The absurdly named Foreclosure Protection Act does everything but. To get enough of the Senate on board, a key provision was axed that would have altered bankruptcy rules to help homeowners avoid foreclosure. The idea was to give the bankruptcy court limited power to modify existing mortgages for Chapter 13 filers.

Chapter 13 is the "harder" bankruptcy in that the filer isn't looking to wipe anything clean, but rather agrees to a court-appointed payback plan over a three-year to five-year time span, with modifications made to the terms of the debt owed. But under current law, mortgages aren't allowed to be modified by the bankruptcy court. A proposal spearheaded by Sen. Dick Durbin (D-Ill.) would have given the bankruptcy court limited ability to modify mortgages for Chapter 13 filers who could handle payments on a modified mortgage.

But the ever-powerful bank lobby put the kibosh on the proposal, insisting that such a move would raise interest rates for everyone. And Washington bit. It's hard to see how modifying a select pool of existing mortgages would cause the entire pool of new mortgages to become more expensive.

Mixed-Up Priorities at the Top

In the same bill, the Senate approved a $7,000 tax credit over two years for anyone who buys a foreclosed home. Talk about mixed-up priorities: When it had the opportunity to help keep more homes out of foreclosure (via the bankruptcy provision), the Senate punted. Its idea of protection is to let more homes fall into foreclosure and then, after the fact, give an incentive to folks who buy a foreclosed home. Where's the logic in that?

Don't get me started on the value of a $7,000 credit over two years. With the average home price around $200,000, it's not exactly a big deal. Moreover, it's an after-the-fact incentive. If the concern is to get foreclosed homes sold, then help people buy them with down payment breaks, not tax credits a year or two down the line.

Another head-scratcher is a provision that would allow current homeowners who don't itemize their federal tax returns to qualify for a $1,000 annual deduction for property tax ($500 for individuals). Is that really going to solve much for the bulk of people on the brink of losing their homes?

Bailouts 'R Us

But wait, it gets even worse. While the Senate slammed the door shut on the substantive bankruptcy provision, it then swung the door wide open -- and I'm talking a double-wide door -- for businesses hit hard by the credit crisis. The same bill includes a provision that extends the period that a firm can deduct 2008 and 2009 losses against profits from two years to four years. That's going to be especially helpful for homebuilders who are facing big losses this year (and next) and have plenty of profits from four years ago.

The Joint Committee on Taxation estimates that this nice little tax break could generate $25 billion in tax cuts over the next few years, and homebuilders are expected to be at the head of the relief line. As for the bill's provisions that would assist homeowners -- you know, those other constituents -- the Joint Committee on Taxation says that adds up to about $3 billion.

So let's review: The Fed ponies up $29 billion in guarantees to facilitate the bailout-that-shall-not-be-called-a-bailout (of Bear Stearns), and now the Senate proposes a nice $25 billion in tax breaks for stressed-out businesses. That's $54 billion in potential taxpayer liability because of the credit crisis, with the Senate only seeing fit to come up with $3 billion in Band-Aids to help homeowners. Please.

Scorecard Required

As I write this, there's more proposed "assistance" trickling out of Washington. The Bush administration recently acted to extend the FHA Secure program, but that program will help a woefully small number of at-risk homeowners. The House is holding hearings on a more expansive assistance program.

One of the hardest challenges for lawmakers is defining the parameters of who should be helped. I like the early signs that aid would only be available for mortgages on primary homes; save the homes where people live, not where they're speculating or vacationing.

From there the task becomes even harder in terms of determining how to make unaffordable homes affordable. One idea percolating is how to get lenders to forgive portions of troubled mortgages (that is, reduce the principal) so the homeowner can then refinance into a more affordable fixed-rate loan. Sound like a huge government bailout? Well, maybe yes and maybe no.

One of the ideas being batted around is to create a mechanism so that the entity that forgives part of a current loan -- be it the lender or the government -- would get a portion of any profit when the home is sold down the line. Complicating matters (as if they aren't complicated enough) is the multitudes of "lenders" in this mess. As we all know, it's not just conventional commercial banks that hold mortgages, but a lot of Wall Street entities that no one really knows much about. So putting any new plan into action won't be easy given the number and variety of different players.

Help for the Qualified

Nevertheless, something has to be done to help qualified homeowners -- and I do mean qualified. I'm not suggesting a blanket bailout. The sad truth is that there are some people with unaffordable mortgages who never had the financial stability in the first place to really afford their home.

Were some of them guilty of lying about their income and assets so they could get a mortgage? Of course. And now they're going to face their comeuppance. But I guarantee you that an even bigger culprit in this mess were the aggressive mortgage lenders -- egged on by Wall Street investment banks chomping at the bit for more loans to securitize -- who talked a smooth game and enticed people into mortgages they couldn't afford; didn't bother to verify applicants' income; and encouraged inflated appraisals so the numbers would "work" on loans.

The bottom line is that a large chunk of the mortgage-stressed simply doesn't have the income to remain homeowners now that the smoke and mirror days of option-payment and negative-amortizing mortgages are over.

Real Relief on the Horizon?

I'm looking for Washington to consider the large contingent of at-risk homeowners who, with a moderate level of intervention, can get themselves into a fixed-rate loan they can afford.

And I absolutely agree that any future profits those people realize from a home sale should be shared in some way with the entities -- the lenders or the banks -- that help them out today.

The Foreclosure Protection Act that made its way through the Senate was an embarrassment for its lack of focus on homeowners. Let's hope the more thoughtful proposals that are beginning to bubble up will foster a meaningful debate on ways to extend assistance to qualified homeowners without triggering a massive federal bailout.