the Door on Foreclosures
complain that the Obama administration still isn’t taking
the needed steps to save homeowners
By David Moberg
Like millions of other Americans, Alicia and Jorge Hernandez
are hanging on to their home by a thread. Six years ago
they bought their brick bungalow in a working-class neighborhood
on Chicago’s southwest side for $175,000, a bargain compared
to homes nearby that sold for $250,000. Jorge, who earned
$18 per hour as a roofer, had earnestly avoided debt, but
a mortgage broker offered him a fixed interest rate of 5.25
percent on a conventional loan. With a growing family, now
including three young children, it seemed like a good deal.
the housing bubble burst in 2007. On each block throughout
the neighborhood, several families—at first mainly those
with sub-prime loans—lost their homes to foreclosure. Housing
prices fell sharply. The Hernandez home is now worth $119,000,
well below the $146,000 still owed on the mortgage. The
construction industry imploded and Jorge, 41, could find
only scattered jobs. He now collects about $220 per week
in unemployment benefits.
are a little bit struggling to make our payments,” says
Alicia, 39, her voice breaking as she juggles her two-year-old
son. “We’ve cut out what luxuries we could, like cable.
Now we have to decide to continue our lifestyle or cut everything
and make the mortgage payments.”
The family ran through its savings, then borrowed from relatives
as Jorge’s income continued to slide. But unlike many unemployed
workers in past recessions, they had no equity in their
home as collateral for temporary credit. Early this year,
they fell behind on their mortgage by three months.
Alicia looked for an administrative assistant job similar
to the one she had after college, but nothing turned up.
Then she found a job for $8 per hour at a bulk-mailing subcontractor
to the U.S. Census Bureau. But even with that paycheck and
Jorge’s unemployment compensation, they owe more than half
of their monthly income for the mortgage. “Like many Americans,
we were hoping next year would be better,” Alicia says.
“We just relied on hope. That was our mistake.”
The Hernandez family is the new face of the deepening home
mortgage foreclosure crisis—a crisis that is increasingly
affecting suburban and upper middle-income homeowners as
In the earlier waves, most foreclosures involved speculators
or holders of sub-prime loans that were designed to fail,
according to the North Carolina-based Center for Responsible
Lending, an advocacy and research organization. Its research
shows the fault in the sub-prime collapse lay with the loans,
not the people who borrowed the money. Many of them could
have qualified for a conventional, fixed-rate mortgage and
Although the new wave of foreclosures this year will involve
other exotic mortgages (especially interest-only and payment-option
adjustable rate mortgages), most recent serious delinquencies
and foreclosures involve conventional loans.
Around three-fifths of homeowners seeking loan modifications
under President Barack Obama’s Home Affordable Modification
Program (HAMP) cite loss of income as the cause of their
hardship. At least one-fourth—and by some estimates one-third,
heading toward one-half—of all mortgages are currently “under
water,” meaning that they are worth more than the market
value of the home. Under those conditions, homeowners have
strong incentives to walk away, leaving investors holding
their costly mortgage and devalued property.
in late March to these new trends in the housing crisis,
the Obama administration rolled out the latest version of
HAMP, which offers new provisions to deal with underwater
mortgages and unemployment, some of which might help homeowners
like the Hernandez family.
But consumer advocates like the Center for Responsible Lending
and the Washington-based National Community Reinvestment
Coalition (NCRC) are not happy with the Treasury Department’s
proposals. “We continue to tinker around the edges of foreclosure
prevention,” says NCRC president John Taylor. “We rush to
give banks tax breaks, but we dawdle to help homeowners.”
The fundamental problem is that the Obama administration
and Congress are reluctant to use the legal, political and
judicial forces at their disposal to cut through the Gordian
knot of special interests that block meaningful reforms.
Instead, banks, investors, mortgage service companies, rating
agencies and other financial interests that caused the problem
are encouraged and bribed (“incentivized”) to modify troubled
Neil Barofsky, the special inspector general for TARP, warns
that this scheme “risks helping the few, and for the rest,
merely spread[s] out the foreclosure crisis over the course
of several years, at significant taxpayer expense and even
at the expense of those borrowers” who struggle to pay modified
loans but eventually default.
Dean Baker, co-director of the Center for Economic and Policy
Research, advocates giving defaulting homeowners the option
of staying in their homes and renting at market rates for
five or more years. Besides keeping people in their homes,
the right to rent gives them bargaining leverage with banks
to modify loans, since bankers have no interest in being
Consumer advocates, such as NCRC, National Peoples Action
and the Center for Responsible Lending, fought hard for
Congress to give bankruptcy courts the power to modify home
mortgages—the only major property excluded from the courts’
oversight. But the proposal was defeated in the Senate,
which prompted legislation sponsor Sen. Dick Durbin (D-Ill.)
to say the banks “own the place.”
With the support of the NCRC, Rep. Brad Miller (D-N.C.)
and 26 other congressional Democrats recently proposed that
the Treasury use its existing powers to set up an equivalent
to the Home Owners Loan Corporation (HOLC), the successful
New Deal-era agency. The new HOLC would use the power of
eminent domain to buy up large quantities of distressed
loans at their current market value, then modify and refinance
Both homeowners at risk of foreclosure and the government
need such powerful tools to get deals done quickly and to
shift the costs of resolving the crisis to investors and
institutions that were responsible. Such cost-shifting could
weaken some banks, but oddly, it could also be the best
option available—it’s certainly better than foreclosure—in
most cases for banks and investors, as well as for homeowners.
Foreclosure costs both banks and surrounding communities
dearly. Valparaiso University Professor Alan White estimates
that avoiding foreclosure saves investors more than $50,000
on an average home and avoids external costs—homeowner relocation,
depressed neighborhood real-estate values, local government
costs—of $100,000 to $150,000.
to lenders on nonprime foreclosures are as high as 50 percent,
yet the pace of modifications remains frustratingly slow,”
NCRC’s Taylor testified in March before the House Oversight
Committee. “It would seem preferable for a financial institution
to modify a loan and take a loss of 20 to 30 percent or
even 40 percent rather than undergo the considerable costs
associated with a foreclosure.”
But many investors or banks hope they can bleed homeowners
as long as possible, even though many banks now feel pressure
from their growing inventory of distressed loans and the
increasing risk of underwater borrowers walking away in
strategic default. And they hold out hope for bigger government
bailouts, like proposals to pay banks to reduce principal
on distressed loans.
Efforts to modify distressed loans started in a modest,
ineffective way under former President George W. Bush. The
Obama administration has continued to rely on voluntary
action by financial interests, and has committed larger
amounts of money to support and stabilize home ownership
through loan guarantees, purchase of mortgages and mortgage-backed
securities, incentives to banks and new homeowners, and
its modifying of mortgages through the Making Homes Affordable
programs (including HAMP).
But Obama’s programs have had little effect. Last year,
foreclosures rose by nearly 2.8 million and experts expect
the number to rise again by at least 3.5 million in 2010.
(With roughly 7 million homes now in some stage of foreclosure,
analysts predict another 13 million foreclosures during
the next five years.) Furthermore, as some government props
for the housing market come to an end, many analysts expect
weak sales and falling prices for many months to come.
Although Obama administration officials said that HAMP would
help 3 to 4 million homeowners by 2012, the special inspector
general for TARP reported that in its first year, through
February, HAMP provided permanent modification to only 168,708
mortgages. Even these “permanent” modifications only reduce
interest rates and last five years. The Treasury Department
expects 40 percent of the permanent modifications to re-default
and perhaps face foreclosure within those five years.
is HAMP so ineffective? First, the program’s roll-out was
rocky, and the banks and servicers were often slow and disorganized.
More fundamentally, says Kathleen Van Tiem of the Southwest
Organizing Project, which helps homeowners in the Hernandezes’
neighborhood, HAMP falls short because it uses a flawed
financial model to decide which loans to modify. For example,
the model overestimates the likelihood that troubled loans
will resolve themselves. Further, the model is based on
finding the alternative for the loan that is most profitable
for investors, not best for the homeowner or community.
Equally important, federal policy does not require anything
from mortgage finance world players, who are obscure and
plagued with conflicting interests. Holders of second liens
on property and principal mortgages were often at odds.
Companies (including banks) who were servicing loans often
fared worse with modification than foreclosure—while banks
holding loans might benefit from modification. Investors
in mortgage-backed securities were often splintered and
not organized to act at all. Without any mandates, action
With unemployment—especially record long-term joblessness—contributing
to the rise in foreclosures, government needs to do much
more to stimulate job creation, says Baker, especially since
the housing sector will not be able to play its traditional
role in leading the economy out of recession. Yet reversing
the downturn is not enough. In past recessions, there was
no spike in delinquencies and foreclosures with increased
unemployment. Widespread negative equity and the lingering
effects of predatory loans mean that the government must
both boost job creation more and restructure mortgages,
including guaranteeing borrowers a right to rent.
Though homeowner advocates lament the loss of $7 trillion
in wealth with the housing crash, much of that was bubble
money. Trying to prop up home prices below their historic
trends helps no one ultimately, says Baker, although he
acknowledges that the housing market could overshoot as
it deflates as well.
But it is possible for the federal government to help homeowners
force banks and investors to absorb more adjustment costs,
keep people in their homes (even as renters), protect community
interests, and work through the rubble of the busted housing
market as rationally and humanely as possible.
For that to happen, the Obama administration, much as it
has tried to avoid it, must get tough on the banks and stand
up for homeowners victimized by weak regulation, bank deceit
and economic collapse. A firm policy that requires financial
institutions to reduce mortgage principle would combine
good economics with winning politics. Many Americans, like
the Hernandez family, have been living on hope. Obama needs
to redeem those hopes.
Moberg is a senior editor at In These Times, where
this article first appeared. Source: featurewell.org.