Editorial: Foreclosures hurt everyone, not just borrowers

For 20 years, the housing market was hotter in Arizona than wildfire. Developers, buyers and sellers were borrowing and spending on homes, driving up prices and creating wealth with their investments.

The American dreams of home ownership and wealth were alive and well. Mortgage brokers were on every corner. Lenders were offering low, variable interest-rate loans. Builders were dividing the desert into lots. Flipping, the process of buying a home and selling it for quick profit, became part of the state lexicon.



Now the other shoe has dropped, and someone has to take responsibility.

Thousands of Arizonans face foreclosure or the threat of foreclosure after the collapse of the sub-prime mortgage market. Variable-rate mortgages have kicked in, increasing monthly payments. The stock market has been on alert with the tightening of credit, sending many investment and retirement portfolios into tailspins.

The responsibility starts with people who overextended themselves. They must face the consequences of their decisions. Unfortunately, a slower market makes it hard to sell homes on a timely basis. Tighter credit makes it difficult to refinance. The vulnerable, especially senior citizens and the poor, become prey for predatory lenders. That adds up to possible foreclosure.

Governments and lenders bear great responsibility in the fallout. They need to act, in our opinion, before it’s too late. A booming housing market created glowing economic numbers that politicians embraced. They must not run and hide now that the market has soured, jeopardizing vulnerable citizens.

In a May editorial about the housing slump, we called on Arizona to impose a six-month moratorium on foreclosures. We repeat the call this morning and hope it does not fall on deaf ears. We also embrace the call by Sen. Hillary Clinton, D-N.Y., to create a $1 billion federal fund to help homeowners avoid foreclosure.

The moratorium would allow borrowers to explore options and keep lenders from being deluged by costly foreclosures.

Banks do not want homes to sell. They are in the loan business, not the real-estate business. They lose money when they have to foreclose. They just want the interest from the loan.

A six-month suspension of foreclosures would not take away the lender’s lien or rights, but it would bring stability back to the housing and mortgage markets. Banks generally foreclose after three missed payments.

The suspension of foreclosures should include a provision to allow debtors to roll the three missed payments back into the principal, plus interest. Putting the missed payments on the end of the loan would give those facing foreclosure a much-needed fresh start. In these troubling times, banks should be rolling payments into loans as standard practice, without government interference.

Some builders have announced weaker-than-expected earnings as a result of the slowdown. The state has adjusted its forecast for tax revenue, leaving a possible $226 million gap in the budget. It’s doubtful the private sector and state government have the money immediately to do what’s necessary to create a bailout fund.

Any proposal should target predatory lenders and the practice of not including money for taxes and insurance in mortgage payments. Predatory lenders weigh borrowers down with prepayment penalties and crush them with out-of-pocket tax payments. Tax and insurance payments generally are kept in escrow by mortgage companies until it’s time to pay.

Clinton’s call Tuesday for reform came after the nation’s 10th-largest mortgage lender, American Home Mortgage Investment Corp., filed for bankruptcy protection. Two other mortgage lenders said they are not accepting new applications.

It was comforting for Clinton to say that if President Bush fails to act, she would as president. Unfortunately, her promise might be too late for thousands at risk in Arizona.

“They believe in letting everyone fend for him or herself,” Clinton said of the Bush administration. “They believe in what the president calls an ownership society, which is really you’re on your own.

"It’s the yo-yo economy; some go up and some go down, and the strings are pulled by other people,” Clinton said, repeating a familiar theme from her campaign speech. “I don’t think that’s how America works best.”

More than 27,500 foreclosure filings, including default notices, auction sale notices and bank repossessions, were reported in Arizona during the first six months of the year, according to the research firm RealtyTrac. The number is a 118 percent increase from the same period a year ago. The filings were reported on 15,551 properties. Nationwide, 925,986 foreclosure documents were filed in the first half of 2007, up more than 55 percent from the same period last year.

No one benefits from foreclosure. Borrowers face ruined lives and depleted credit. Banks face increased costs. Communities face the prospect of abandoned homes. Other homeowners face dwindling property values.

In addition to embracing a moratorium and a $1 billion fund for help, we call on Gov. Janet Napolitano to create a state board of experts to recommend ways to prevent massive foreclosures from ever being a consideration again.