U.S. can but won’t ensure housing in foreclosure crisis

As the richest nation on the face of the earth, the United States could do something to help its homeless population.  How can it , when the government will not work to keep solvent families from ruinous foreclosure?

The U.N. has a special rapporteur for the right to adequate housing. Her name is Raquel Rolnik and she has found, based on the guidelines for adequate and appropriate housing laid out in a February 2009 U.N. report, that the U.S. governments’ treatment of the homeless is “shameful”.

She’s undoubtedly correct. Its unsurprising that she was discouraged from completing her report years ago, by Bush Administration opposition. Now that the Obama Administration has removed objections to the report, they may still be surprised to learn that Rolnik is is critical of the Obama’s administration’s handling of the current Mortgage crisis.

No one should be surprised that Obama administration has done so little to protect people from homelessness, given what they’ve done to help people retain their homes via mortgage relief.

As the graphic below shows, the end of the second quarter of 2008 showed a marked increase in foreclosures over the same period in 2007. Thus at the beginning of the housing crisis, we were looking at an alarming increase in vacant homes being dumped onto an already overbuilt market.

America foreclosed and how it got worse: 2008 Homes in foreclosure with sub-prime mortgages, end of second quarter 2008, % increase on previous year.

Source: http://image.guardian.co.uk/sys-files/Guardian/documents/2009/11/12/US_mortgages_260908.pdf

The Bush administration responded in September 2008 with a direct stimulus payment to large banks, intended to shore up their bottom lines and enable them to extend credit to mortgage holders.

At the time, Democrats were critical of the plan as implemented, correctly noting that it did not protect individual homeowners from foreclosure.. Speaking shortly after the election to emboldened Democrats on the House Financial Services Committee, outgoing Secretary of the Treasury Henry Paulson said, “The primary purpose of the bill was to protect our financial system from collapse,” Mr. Paulson told the House Financial Services Committee. “The rescue package was not intended to be an economic stimulus or an economic recovery package.”

Democrats on the committee, were openly hostile. Then (and current) FDIC Chair Sheila Blair, speaking in front of the same committee recommended, according the the NYTimes:

Under her plan, the Treasury would refinance mortgages for people if it is possible to reduce their monthly payments to about 32 percent of their monthly income. To encourage existing mortgage lenders to settle for lower payments, the government would accept responsibility for half of the losses if the homeowner defaults a second time.

And in the same article this plan was endorsed by Nancy Pelosi. 32% of your income is a bit steep, but it is better than foreclosure in most cases. However, no mortgage relief program was included in the January 2009 stimulus package.

It wasn’t until March 2009 that a mortgage relief program was announced, one that fell far short of even Bair’s November 2008 proposal. According to a CBS News report, the plan consisted of “detailed guidelines designed to let the lending industry know how to enroll borrowers in the program” and a website www.FinancialStability.gov. containing “answers to common questions and assessment tools..to help borrowers determine if they are eligible.”

As would subsequently be shown in practice, there were no inducements in the bill for mortgage holders to negotiate with homeowners. What the bill did do, was make it theoretically possible for homeowners to obtain a judicial mortgage adjustment in bankruptcy court.

Borrowers also would have a responsibility to prove that they tried to modify their mortgages with their lenders before seeking help in bankruptcy court.

Rep. Zoe Lofgren, D-Calif., one of the centrist negotiators on the bill, said homeowners in fear of losing their homes would have to show that they provided their financial documents to their lenders, “not just a phone call to an answering machine.”

The deal would require judges to consider whether homeowners were offered a “qualified” loan workout – defined as one that would set monthly payments equal to about one-third of a homeowner’s income.

Bankruptcy judges would have to deny a judicial mortgage adjustment in cases where the homeowner is deemed able to afford the loan.

From the point of view of the industry, the legislation actually inhibited judicial mortgage reviews, by requiring the homeowners documentation. The burden of responding to any offer, no matter how unreasonable, or a complete lack of response from the bank lies on the home owner.

Their opposition helped derail the bill last week, even after leading Democrats agreed to restrict it to people who had tried other means of reworking their mortgages and those who couldn’t afford their home loans.

The industry has “been giving it everything they’ve got,” said Rep. Brad Miller, D-N.C., an architect of the legislation. “They still have remarkable influence.”

Eight months later, the initial result of this plan is known and the results aren’t encouraging. According to a November 10 Wall Street Journal report, only about 1 in 5 eligible homeowners have successfully enrolled in the plan. Another way of looking at that is 4 our of 5 people who could pay an adjusted mortgage are receiving no help and stand to loose their homes.

The Wall Street Journal looks at this optimistically – that the program is picking up speed. but if only 4 our of 5 are being helped, then the program is a failure. Any potential help may come too late.

J.P. Morgan Chase & Co. said last week that more than 92,000 of its customers have made at least three trial payments under the program, but just 26% of them had submitted all the required documents for a permanent fix. Many other borrowers are still in the early stages of the program.

At Morgan Stanley’s Saxon Mortgage Services, about 26,000 of the 39,000 borrowers in the program have made more than three trial payments. Roughly 500 have received completed modifications.

“It’s hard to get the documents in,” said Saxon Chief Executive Anthony Meola, adding that 82% of borrowers are current on their trial payments. Mortgage servicers collect loan payments and work with troubled borrowers.

“It’s a fiasco in the making,” said Alan White, an assistant professor at Valparaiso University in Indiana, citing preliminary information about low numbers of permanent modifications and complaints from attorneys and housing counselors.

“The good news is you’ve gotten all these homeowners in from the cold and on these temporary modifications,” Mr. White said. “The bad news is we are stumbling in getting all these people…all the way” to keeping their homes.

While this plan has helped 20% of those considered eligible so far, ti must arrive too late for the millions that

In bailing out the banks, the Bush and Obama administrations let the banks go on autopilot – which means foreclosures without negotiation. Neither administration placed controls or restrictions on how the banks sorted out the good properties from the toxic assets. This allowed them to proceed pretty much as the market has always worked.: foreclosing looks good on the books.  Writing off any portion of the principle does not.  NPR call-in shows on the housing crisis are overrun with people still working and able to pay something facing foreclosure from a bailed-out bank.

In the last week, the Obama administration announced that they would put rules in place that would enable one-time owners to rent out foreclosed properties. This may encourage banks to become landlords, but won’t help single family home owners in foreclosure. Its doubtful how much this will help in the long term, but it does preserve the free-market credentials of the current administration.

Given that the current administration is no better than the last in protecting homeowners from an uncontrolled wave of foreclosures, it is unsurprising that homelessness and hunger are on the rise. If the U.S. can’t create a social safety net to protect its middle class property owners, it has never considered feeding and housing the homeless.

There are other alternatives, notably those proposed by Bair and Paul Krugman, that while remaining true to market control, still would have protected homeowners first. There are other less-market based solutions, but these can’t be implemented, though they are kinder to the population, because they’ve never been considered.

One alternative would be the so-called Swedish Solution: nationalizing the banks, separating the truly-toxic from the negotiable-to-good assets, the bad assets are concentrated in a “bad bank” which deals with them in turn. The now solvent “good” banks are loosed yet again upon the market. This isn’t even socialism, just social democracy: protecting society at large before protecting assets.

Last year people argued that the Swedish system was many times smaller and less complicated than the U.S. banking system. This is true, but the disruption to families falling behind on their payments would have been less shattering.

One base of reference for how societies with means provide a social safety net in housing might be found in this UN report:
http://www.unhcr.org/cgi-bin/texis/vtx/refworld/rwmain?docid=49a54f4a2

Here is the Guardian article on how foreclosure crisis is pushing millions into homelessness:
http://www.guardian.co.uk/world/2009/nov/12/un-investigator-us-neglect-homeless

Raquel Rolnik’s blog: [in Portuguese]
http://raquelrolnik.wordpress.com/

Also of interest: a mortgage delinquency map at Huffingtonpost:
http://www.huffingtonpost.com/2009/10/09/mortgage-deliquencies-see_n_315547.html

Also of interest: the NY Federal Reserves’ map of US credit conditions, searchable by Zip Code: http://data.newyorkfed.org/creditconditions/

Bloomberg article on cost of bank bailout: Financial Rescue Nears GDP as Pledges Top $12.8 Trillion . By Mark Pittman and Bob Ivry.

MrZine: The Failures of Tarp.

Advertisements

Posted on November 18, 2009, in Analysis, housing forclosure, Statistics and tagged , , , , . Bookmark the permalink. 2 Comments.

  1. What’s the advantage for US to ensure homes in foreclosure?

    • Ensuring housing for people currently living in foreclosed homes would avoid the add-on problems of homelessness: emergency housing, displacement, domestic stress not to mention the risk of a sudden collapse in housing prices. Housing prices are going to go down, but deflating the prices prevents panic, and protects the economy from sudden crises.
      The Bush administration, followed by the Obama administration are going with a very expensive and short term cash infusion into major banks, intended to encourage lending. Greater lending and renegotiated terms have not followed. The banks have behaved pretty much as they would before, by foreclosing on properties without renegotiating.
      By beginning with the proposition that people who afford to pay a reasonable mortgage rate (but not an A.R.M.) should be getting the benefit of the stimulus.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: