Voluntary Foreclosure Prevention Fails to Deliver
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."
With HAMP's steadfast faith in corporate volunteerism doomed to fail, progressive legislators are pushing the administration to look at new approaches.
To that end, Grijalva and Kaptur penned a letter along with twenty-five House Democratic colleagues to Treasury Secretary Timothy Geithner suggesting the establishment of "a new federal entity" modeled after FDR's Home Owners' Loan Corporation (HOLC). The letter notes, "During the Great Depression, the government successfully acquired, refinanced, serviced and sold more than a million mortgages, accounting for one in every five non-farm dwellings in the United States. Such actions prevented untold foreclosures, and even managed to return a small profit to the Treasury."
The new HOLC would be capitalized through remaining funds in the Troubled Assets Relief Program (TARP). It would have the power to purchase distressed mortgages at auction, and also at fair market value through eminent domain. The authors of the letter point out that the Emergency Economic Stabilization Act of 2008 authorizes the Treasury Secretary to purchase "troubled assets from any financial institution...on such terms and conditions as are determined by the Secretary."
"We're replicating what happened in the past," said Grijalva. "But it worked, it didn't cost the taxpayer money, and it returned a little profit to the Treasury.... We need to tell Wall Street and the lenders--this is the way the business is going to be run. This is the intervention the government is bringing to you. And not be shy about that. We'd get a lot of support from the American people because of who we're regulating and because this is a crisis and every community knows it's a crisis."
Those who oppose this kind of intervention because they believe it rewards bad behavior--the moral hazard issue--are missing the big picture. Everyone is impacted by this crisis, not just families who lose their homes. And the major drivers of this crisis are now unemployment and homeowners who are underwater, not those who took on mortgages they couldn't afford. (And even many of those homeowners were steered towards bad products through predatory and deceptive practices.)
"Everybody has a dog in this hunt when it comes to these foreclosures," Taylor recently testified at a House Committee on Oversight and Government Reform hearing assessing the HAMP program. "Every foreclosure reduces the value of their neighbor's property. Millions of foreclosures caused job loss, reduction in tax revenue and has dragged down the American economy. Foreclosures reduced all homeowners' equity and for many a significant portion of their retirement savings. Over $7 trillion of wealth has been lost by American households."
"We're misreading the impact that foreclosure has in a lot of areas," says Grijalva, "in the health of a community, the economy, and the social fabric of a community. The cost of continuing to let the lenders dance around the edges in terms of this housing crisis and foreclosure crisis is that with every foreclosure--and more are expected this year and then more the year after--that is just a bigger hit on the economy."
I asked Congressman Grijalva why--besides pressure from financial services industry lobbyists--there is so much resistance from the Obama administration to forcing principal reductions.
"Many of the people making and crafting these decisions have been intimates and come from the same farm," said Grijalva. "So, I think there is almost a cultural reluctance to mess with the system that they came from. You need a real outside perspective--outside of Wall Street and the financial services industry to really bring some creative ideas."
That's exactly where Kaptur is now turning her attention. She secured a commitment from Secretary Geithner to meet in April with her and some policy experts who are on the ground in Ohio and experiencing the crisis firsthand.
"We're trying to bring Main Street to them," she said. "Sharing the experiences of the key people in our state who are involved in housing and bank regulation. We feel the administration can use Ohio as a checkpoint against which they can measure their programs' effectiveness. For example, HAMP is not having a huge impact in Ohio. We need to share where Ohio is and where we need to be."
Kaptur says HOLC is "one possible tool, but not the only tool." Another possibility is allowing people to remain in their homes through a turnkey program, a rent-to-own program with forty-year mortgages--or possibly a right-to-rent program keeping families in homes at an affordable rate.
"We have got to put a tourniquet on this to stop the bleeding," Kaptur said.