More Mortgage Madness
Obama's plan aims to fix this by offering servicers major incentives. It whittles away at the margins but avoids foundational questions: can the crisis be stopped as long as the mega-servicers call the shots, and can we simply buy them off?
The mega-servicers, for their part, certainly say their participation can be bought. The top three answered an ACORN survey by declaring that they plan to participate and that they intend to start right away. Nonetheless, the Mortgage Bankers Association sent a February 23 letter to the administration asking for "realistic expectations" of how quickly servicers will be able to move. The group offered its help to craft ways to "streamline the process."
One way industry lobbyists don't want the process streamlined is by giving borrowers leverage. Currently, bankruptcy judges are barred from modifying loans on primary residences. Changing that law has been a priority for consumer advocates for years, and Obama's plan asks Congress to finally do it. The point isn't so much to help borrowers who end up in bankruptcy court--hardly an ideal outcome--but rather to arm borrowers with a countering threat when offered crappy loan workouts. The large servicers do not relish the idea of a judge digging through poorly made and poorly serviced loans, many of them riddled with fraud.
Obama has repeatedly refused, however, to go to the mat on bankruptcy reform, and the banking industry sees this opening. After the House hustled its version through in March, industry lobbyists conspired with Republicans and moderate Democrats to kill it in the Senate, where it was stripped from the broader housing bill, leaving Obama's foreclosure relief plan toothless.
Many advocates say bankruptcy reform is, in any case, just the beginning. Some have called for a national moratorium on foreclosures. "We could lose a million homes in 2009 while we wait for servicers to catch up and implement modifications," says White. Problem is, the foreclosure process is governed by states, which means any federal move would be legally cumbersome and likely too narrow. So ACORN is lobbying the administration instead to entice states with TARP money to create mandatory "pre-foreclosure mediation" programs--sort of like arbitration for failing loans.
In an April 3 letter to Housing and Urban Development Secretary Shaun Donovan, ACORN pointed to the widely reported success of a mandatory mediation program launched under court order in Philadelphia last spring. Several states and localities have followed Philadelphia in creating some variation of mediation or are debating it. ACORN wants the administration to divert TARP money into matching grants for states that join the movement. It also asked HUD to let states fund mediation from the $6 billion in "neighborhood stabilization" cash that Congress allocated in the past year.
Mandatory mediation would give borrowers leverage to plug another hole in the Obama plan: that servicers are not forced to write down loan principals. The plan puts lowering interest rates ahead of writing down principal; it doesn't address the fact that many borrowers were conned into loans they could not afford, regardless of the interest rate.
Meanwhile, economist Dean Baker argues that the ideas on the table are mere stopgaps. He says the best way to give borrowers real leverage is to give them the right to stay in a foreclosed property as renters--making the house impossible to resell. "Suddenly, foreclosure looks like a less attractive option" than working out a deal, Baker says. He has pushed the idea in Congressional testimony, but it's gone nowhere. He blames "this ideology of homeownership" that says owning is always better than renting. A right-to-rent law, he argues, would force investors and servicers to work with viable loans while accepting the reality that some inflated equity never existed in the first place.
So far, none of these ideas for strengthening the borrower's negotiating hand have gained traction. In February ACORN launched direct action campaigns in twenty-four cities. Even as ACORN praised Obama's initiative, it declared that activists would begin blocking foreclosures. In many ways, that civil disobedience represents an escalation of the legal hand-to-hand combat defense lawyers have engaged in for more than a year.
"I feel like, at this point, bring it on," George Gallon declares angrily. "But I feel blessed. Because there are people with children, working really hard, and now they don't have a roof over their head--because of this." He thumps the mess of documents sprawled across his kitchen table. "It's ridiculous, and if you don't have somebody like Goliath, there's no end."