The foreclosure crisis has gone from bad to worse.
Over 2.4 million foreclosures are expected this year, up from 2.1 million in 2009. One out of every four homeowners is now underwater–owing more on their mortgages than their homes are worth. More than one in seven are behind on their payments.
The Obama administration’s main focus in its fight against foreclosures is the Home Affordable Modification Program (HAMP).
Once touted as a program that would help 3 to 4 million borrowers by December 31, 2012, it has helped fewer than 200,000 people receive permanent modifications. (And "permanent" modifications only guarantee the lower payments for five years.)
With a record like that, it’s no surprise that last week the administration announced some tweaks to its approach to much (too much) fanfare.
New requirements for banks would help unemployed people by reducing mortgage payments to 31 percent of their unemployment benefits for three to six months. (Homeowners would then need to repay their payment savings with interest, according to Julia Gordon, senior policy counsel for the Center for Responsible Lending.) And there are new incentives for banks to do principal reductions for homeowners who are underwater, and to modify or extinguish second liens.
But the key word here is "incentives." Incentives for banks to voluntarily do the right thing is the reason that both the Bush and Obama administrations have failed to stem the tide of foreclosures. American homeowners need mandatory principal reductions.
"I’m not optimistic that the incentives will be enough to entice servicers and investors to reduce loan principals," said John Taylor, president and CEO of the National Community Reinvestment Coalition. "The real acceleration in the number of foreclosures prevented will come with mandatory principal writedowns."
Congressman Raúl Grijalva, co-chair of the Progressive Caucus, agreed. In a recent phone interview he told me, "The fundamental problem–and we learned this with previous efforts to slow down the foreclosure rate–is the fact that it’s voluntary on the part of the lender. It’s not just a question of looking at the mortgage and making some modifications. The endgame should be keeping people in their homes."
Congresswoman Marcy Kaptur–who was focused on the foreclosure crisis long before others even recognized there was one–also told me, "The full weight of the federal government is not being used effectively. We still have a hands-off attitude that somehow downstream these ossified bureaucracies of service companies and large banks will act in good faith. But when left to their own devices, guess what? They don’t."