2.25 million foreclosures were filed last year and at least 1.7 million are expected this year. This dramatic housing crisis is at the origin of the current financial and economic woes our country is experiencing. But if you were to look at Washington, you would hardly notice. Last February, Senator Dick Durbin (D-Ill.) introduced a proposal to redesign Chapter 13 in an attempt to help homeowners avoid foreclosure. In the past year his proposal was largely ignored. In the meantime, Congress approved a $168 billion tax cut for the first stimulus package, $700 billion to help banks, and even held an emergency session after the election to help General Motors and Chrysler. Compare it to HOPE, the limited program for homeowners approved only in October with nominal success to date.
The Bush administration is working on a plan to help homeowners at risk of default. This would be the second time this year that legislators intervene to help homeowners; in July, President Bush already signed legislation to help borrowers to refinance at more affordable rates. For an academic analysis of that legislation and the way it impacted taxpayers, homeowners, and the financial industry, see the recent paper by Mian, Sufi and Trebbi. Mian and coauthors argue that special interest campaign contributions from the financial services industry and local constituencies predict Congressional voting patterns when it comes to recent government interventions. Interestingly, the probability that one member of the House of Representatives voted in favor of the so-called “bailout plan” passed this October by Congress (Emergency Economic Stabilization Act) is affected positively by the political contributions from financial firms that ultimately benefitted from the legislation.