Congress must get tough on banks

By Jessica D. Gabel

Congress’ “spare the rod, spoil the child” routine with banks needs to stop. The Troubled Asset Relief Program may have bailed out the banking sector, but it has failed the American taxpayer.

With barely a moment’s hesitation, the federal government handed over funds to banks that engaged in risky lending practices — few questions asked, and even fewer promises needed.

As the big banks have begun to repay the funds and the government touts the success of the program, the foreclosure rates continue to climb and smaller banks continue to crash and burn.

This problem is particularly true in metro Atlanta, and on Monday, Reps. Dennis Kucinich (D-Ohio), David Scott (D-Ga.), and Lynn Westmoreland (R-Ga.) held hearings in Atlanta to examine the “continuing crisis” in the local residential real estate market.

While the congressmen listened to witnesses explain the ongoing problem, this road show may have rolled in a little late. Unless Congress is willing to make some drastic changes to the way that banks do business, the chances of experiencing another mortgage meltdown dramatically increase.

My parents lost their home in the 1987 economic downturn, yet it seems that any lessons that could have been learned from that recession have been completely ignored in favor of quick money and fast flips in real estate.

Several times in Monday’s hearing, witnesses reminded the congressmen that 9,500 foreclosed homes were slated for auction Tuesday on the Fulton County Courthouse steps.

Unfortunately, the congressmen misdirected their focus to the effect of the crisis rather than the cause. The effect is unavoidable: Atlanta area residents are losing their homes at rapid rates.

Addressing the cause, however, with real reforms can curb and begin to remedy the effect. Congress needs to be proactive, not reactive.

A moratorium on foreclosures will not change the fact that (a) homeowners owe more money on the loan than the home is worth; and (b) banks don’t want to deal with those borrowers. Two reforms can address those inescapable facts.

First, change the way that banks lend money. Borrowing and lending practices in recent years seemed to have ignored the most important factor: how much can a borrower afford?

Banks have, we now know, coaxed people into taking on mounds of mortgage debt that they cannot afford. Even if practices did not verge on predatory lending, much of it was reckless but nothing has really changed.

Credit is tight now, but we presume at some point that it will relax. With that in mind, reckless lending needs to be curbed now, not later. Only regulation can accomplish that since it appears that banks lack the maturity to lend money responsibly.

A change in lending practices can also be advanced by a change in bankruptcy law. The second reform would fix a crack in the bankruptcy system that prevents bankruptcy judges from modifying the mortgage debt on a home to the level of the actual value of that property.

A bill to do that earlier this year died in the U.S. Senate. It’s time to resurrect it. It is not a huge leap to give bankruptcy judges this ability since they currently have the ability to do just that when it comes to commercial real estate, cars, boats and other personal property.

Foreclosures don’t exactly promote economic recovery, and the drag on the system does not end when a home goes on the auction block.

Families tackle homelessness, neighborhoods become vacant wastelands, and banks end up selling the properties at a huge loss.

Keeping a homeowner in a property, making payments adjusted to the property value, will bring about neighborhood, community and economic recovery.

More than a month ago, Federal Reserve Chief Ben Bernanke proclaimed that the recession is “very likely over.”

Unfortunately, we won’t get that memo in Atlanta until there is a change to the way banks approach mortgages. Congress must engage in some tough love with the banks.

The chance that banks will
do so on their own is not very likely.

Jessica D. Gabel is an assistant professor of law at Georgia State University College of Law.