Should We Postpone Foreclosures?
A huge outpouring of contributions and caring have followed Hurricane Katrina, evidence of both generosity and decency that should be applauded. But each day the impact of Katrina becomes less newsworthy and we will soon be back to business-as-usual. The legal and financial system will rapidly come into play, and with normality needless levels of hardship will follow.
Hundreds of thousands of people have lost their homes and cars, two major items likely to be financed. They have also lost their jobs and thus the ability to pay bills.
As a result there are now calls for the suspension of foreclosure proceedings in Louisiana and Mississippi and the delay of new and tougher federal bankruptcy rules scheduled to start in mid-October.
There is surely an attraction to such proposals, and historic precedence as well. In 1983, as an example, the Farmers Home Administration placed a two-year moratorium on farm foreclosures while in 1985 Iowa had a state-wide moratorium on farm properties. As to delaying federal rules, that can be done by Congress and the President in an afternoon.
But once we’re done with the moratoriums and delays, we will ultimately need to deal with the problem that mortgages worth billions of dollars were once secured by real estate, real estate that is now devalued because of Katrina.
Since payments are not being made, many note holders will seek foreclosures — quietly at first, more openly in the future.
Note holders, in fairness, have a legitimate claim to the income and principal associated with their investments. Alternatively, the logic of foreclosures in the aftermath of Katrina is elusive. We now have great numbers of loans secured by properties that are uninhabitable, unsafe, can’t be rented, can’t be sold and will cost big money to make right. Foreclosure in such circumstances makes no sense because the interests of neither the borrower nor the property owner are advanced.
We have seen this before.
In the Dust Bowl years in the 1930s banks would foreclose on farms. Since the farms had no value, the banks would knock down homes to discourage squatters — as Woodie Guthrie explained, families were “tractored out by the cats.”
The country reacted. Under Franklin Roosevelt, we established the Federal Housing Administration in the 1930s and the FHA popularized long-term loans in place of then-common five-year “term” mortgages. With longer loans it became possible to better withstand financial downturns.
Our approach some 70 years later is notably different. The President has suspended the 1931 Davis-Bacon Act in areas impacted by Hurricane Katrina. This is the federal law which assures that workers on government construction projects will receive the prevailing wage — in New Orleans that means about $9 an hour. (See: Bush Suspends Pay Act In Areas Hit by Storm, The Washington Post, September 9, 2005)
Let’s do the math: $9 x 2,000 hours per year = $18,000 in wages — before taxes. This is the wage level the President wants to reduce.
At the same time, FEMA has already handed out five no-bid contracts worth as much as $100 million — each. (See: No-Bid Contracts Win Katrina Work, The Wall Street Journal, September 12, 2005.
“The first large-scale contracts related to Hurricane Katrina,” said the Journal, “as in Iraq, were awarded without competitive bidding, and using so-called cost-plus provisions that guarantee contractors a certain profit regardless of how much they spend.”
How wonderful. Our national government wants to assure that people who have lost everything will not earn $18,000 a year while multi-billion dollar corporations are guaranteed huge profits.
What can we do?
Shrinking government by starving the tax base has not worked. The philosophy is attractive in theory but the results have proven disastrous — just look at federal deficits. We need a different approach, so how about:
- A special tax on Freddie Mac and Fannie Mae profits, say a 50% Katrina relief fund. This reverse tax break would bring in billions of dollars each year for as long as necessary. Given that the federal government started these companies, provided them with potential access to federal coffers in the event of emergency and has shielded them from state and local taxes for decades, the time for payback has arrived. And no, taxing profits will not raise mortgage costs, it will merely mean less for shareholders.
- Taxing estates above $10 million to finance Katrina relief and help balance the federal debt. Virtually no one below that level is now taxed, and those above that level can pay. The screaming about “death taxes” and “double taxation” is nonsense, an effort to distract us from the creation of a permanent patrician class. If Bill Gates and Warren Buffett favor such a tax, so can other plutocrats.
- Having a special prosecutor review every no-bid contract, publish the reviews on a company by company basis and jail everyone who overcharges the government — and make sure the jail is in the bayou.
- Restoring the Bacon-Davis Act so we can create more taxpayers and fewer working poor.
- Having a foreclosure moratorium for at least a year in areas hit by Katrina. Give mortgage investors a tax credit to offset their Katrina losses so their interests are protected. Fair is fair.
- Creating inverse investment tax credits for re-development. That is, rank ZIP codes in areas hit by Katrina and give a higher level of tax breaks for investment in the worst areas.
- Re-building the levees and forgetting the pork construction projects being suggested nationwide.
- Finding out what went wrong with FEMA and fix it.
- Giving credit to the Coast Guard and the National Oceanic and Atmospheric Administration for exceptional work.
It is now time for our federal government to be both conservative and compassionate. The list above is a just a starting point.
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Published originally by Realty Times on September 20, 2005 and posted with permission.
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