It's Time to Treat America's Homeowners as Well as We've Been Treating Wall Street's Bankers
If you were to make a pie chart showing the amount of attention given to the banking part of the financial crisis -- both by the government and by the media -- and the amount of attention given to the foreclosure part, the catastrophe being faced by millions of American homeowners would barely rate a sliver.
But we are facing nothing less than a national emergency, with 10,000 Americans going into foreclosure every day and 2.3 million homeowners having faced foreclosure proceedings in 2008.
When we put flesh and blood on these numbers, the suffering they represent is enormous and so is the social disintegration they entail.
For a small sample, check out Brave New Foundation's new site, Fighting For Our Homes, where you can see video of people doing just that. People like Debra from Pennsylvania who, due to health care costs, is facing foreclosure on her home of 33 years or Penny from Texas who has been pushed to the brink of homelessness as the result of costly repairs necessitated by Hurricane Ike.
"The banks are too big to fail" has been the mantra we've been hearing since September. But when you consider the millions of American homeowners facing foreclosure, aren't they also too big to be allowed to fail?
Despite being treated like an afterthought, foreclosures are actually a gateway calamity: every foreclosure is a crisis that begets a whole other set of crises.
Someone loses his or her home. It sits vacant. Surrounding home values drop. Others move out. Squatters move in. Crime goes up. Tax revenues plummet, taking school budgets down with them. For a devastating look at what foreclosures do to a community, read this brilliant New Yorker piece by George Packer.
So why hasn't the foreclosure crisis gotten the attention it deserves? A combination of perverse priorities and flawed thinking.
At the congressional celebration of Lincoln's birthday, the Senate chaplain thanked God for our 16th president who, as he put it, was able to "transcend the flawed thinking of his time."
Flawed thinking has been on full display in the way we have approached the foreclosure crisis -- particularly the notion that we can postpone dealing with the crisis while we focus our attention (and hundreds of billions of dollars) on saving Citi, JP Morgan Chase, Bank of America and Wells Fargo.
Clearly, this thinking has been deeply -- and disastrously -- flawed. The public interest -- people being able to keep their houses -- is not aligned with the banks' interest. Banks don't want to adjust nonperforming mortgages down to their actual current value because it would lead to marking down the value of the massive asset pools they have rolled the mortgages into.
This conflict between the banks' interest and the public interest is why the Wall Street-centric focus of Tim Geithner, Lawrence Summers, Ben Bernanke, etc. is so troubling. This focus has included the marginalizing of Sheila Bair, the chairman of the Federal Deposit Insurance Corporation (and a Republican) who has been ringing the alarm bell about the foreclosure crisis for two years now. She was ignored by George Bush and Henry Paulson -- and there are worrisome Washington whispers that Tim Geithner is following in their footsteps.
On Wednesday, President Obama is set to unveil his foreclosure relief plan in hard-hit Phoenix. According to David Axelrod, it will be a "good, solid" plan.
Given the enormity of the crisis, and the delay in finally putting foreclosures on the front burner, it needs to be good and solid and big and bold.
Obama clearly responds to the pain involved in the statistics. We saw how he reacted to Henrietta Hughes, the homeless woman who stood up at his town hall meeting in Florida and talked about her dire circumstances. And on Meet the Press this weekend, Axelrod mentioned a "heart wrenching" letter Obama had received from a woman in Arizona whose husband lost his job, and had to take another job for one-third the pay. "They are really struggling to make their payments and meet their responsibilities," he said. "And she was emblematic of people all over the country."
Hopefully the nuts and bolts of the plan will match the empathy. Among the features the plan should include is a provision allowing bankruptcy judges to modify the terms of home loans. This modification is called a cram down (who gave it that name, Frank Luntz?).
Until 1978, allowing cram downs was standard practice. Subsequent court battles eventually eliminated their use. The mortgage industry, not surprisingly (and for the reasons stated above), is vehemently opposed to bringing the cram down back. Helping fight that battle, again not surprisingly, are Republican members of Congress. A bill to bring it back was approved by the House Judiciary committee in late January -- but only after chairman John Conyers agreed to key concessions to the banking industry, including making the legislation only apply to existing mortgages and not to future ones (even though cram downs could help stabilize the residential mortgage market in the longterm. The late, great financial blogger Tanta explains why here).
Obama has said that it "makes no sense" to keep judges from having the authority to rescue underwater homeowners. He should push to make cram downs ongoing and permanent.
His plan should also include mandatory mediation between homeowners and lenders prior to any final foreclosures. A pilot program along these lines, the Residential Mortgage Foreclosure Diversion Program, started in Philadelphia, has proven very successful. According to one account, the program has prevented or delayed foreclosures in 75 to 80 percent of the cases that have made it to mediation. Currently, many homeowners don't even talk to their lenders until they have been foreclosed on -- partly because the lenders often make it next to impossible to reach them.
"I've been to the City Hall Courtroom where the mediation hearings take place," Pennsylvania Sen. Bob Casey told me, "and they are crammed with lenders and borrowers and counselors and lawyers, and they are remarkably effective." Judge Annette Rizzo has been working hard to keep Philadelphians in their homes. She told Dan Geringer of the Philadelphia Daily News:
There is hand-to-hand outreach to each client here. There is individual caretaking here. The lender lawyers get to know the homeowners as people here. We put a human face on this and they embrace it. So as I work the room, I feel a humanism here on both sides. If necessary, our volunteer lawyers pick up clients and bring them here. Housing counselors make house calls. Our mission is to save lives, one address at a time.
The foreclosure prevention program has worked so well in Philadelphia, it has spread to Boston, Pittsburgh, Cook County, Prince George's County, Louisville and the state of New Jersey. The administration should take this model and apply it on a national level.
It's time to start treating America's homeowners as well as we've been treating Wall Street's bankers.
PS HuffPost intends to keep a spotlight on the housing crisis. And one of the ways we plan to do it is by telling the stories of those facing foreclosure -- your stories. If you are struggling to keep your house, click here to sign up to share your story. Or please share the story of someone you know.
We are also looking for citizen journalists to help cover the foreclosure story. Click here to join our team reporting on home foreclosures and how they are impacting your neighbors and your community.
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The country is suffering due to the Banks, not the americans over their head, , due to the banks,, Dumping Billions into those banks, and they refuse to help and solve the problem,,,what is wrong with this picture?
Bank of America had made a lot of bad financial decisions over the past several years which came to fruition in 2007-2008, but Bank of America wanted to be the largest financial institution in the world, and it so bought Merrill Lynch (sort of like that home with the extra bathroom).
So Bank of America didn't have the money or financial stability to buy Merrill Lynch, but the governments regulators look the other way and let Bank of America buy the largest Investment Management Firm in the world, so Bank of America could become the Largest Financial Institution in the World.
But Bank of America found that it was over extended and its value, and the value of its new property (and the additional bathroom in the new property) Merrill Lynch was shrinking and it was facing insolvency or bankruptcy.
So the American Taxpayer restructured the capital of Bank of America by loaning them billions of dollars against warrants to keep them from becoming insolvent.
But try to take action for the American Middle Class, and only to stabilize "At Risk" Mortgages, and we are being told that it is called socialism, with overtones of a “Red Scare”
And if the banks had gotten together to undertake some kind of “Mortgage Bailout” on their own in order to protect the “At Risk” Mortgage assets that they hold, the action by the federal government would not have been necessary.
We're a government of the bankers, by the bankers and for the bankers...!
I thought everyone knew that...
I just love to see Mitch McConnel out giving his expert opinion on what won't work in stimulating the economy. Why didn't he give Bush any of that expert opinion? I don't recall him disagreeing with anything during the last 8 years. The media is irresponsible in not asking direct followups regarding the republicans responsibility for this mess.
Arianna, this post hints in microcosm at the underlying problem, which is not that people are so much living beyond their means, as it is that those "at the top" have put profit above all elase, and have literally squeezed the life out of the system in an attempt, mostly successful, to accumulate all the money for themselves. Remember the fairy tale of the Goose that laid the Golden Egg? Was good advice.
What about those of us who have paid and paid and paid their mortgage and suffered for it but are no where near foreclosure?
We will get nothing.
I suppose we could TRY to refinance and see if we can get a bank to help us out but good luck.
Under this plan those of us who have worked hard to not go bankrupt will get nothing and those who haven't will get "help."
How about if you've never missed a payment in 5 years you get your light bill payed twice a year?
I am so glad that you are able to keep the job so you can meet and pay your monthly obligations. I am one of the lucky too. However, I think the crisis we are seeing is totally created by the mortgage banking system. They always in the past verified that the mortgage you was given, was low enough to meet your monthly payments. In the recent years, they looked away, because of big profit from each transactions. They threw their responsibilities out the window, because of greed.
Greed means nothing.
You can be the greediest person on earth and it will not increase your bank account by one cent.
This problem is a failure of government not a failure of the "mortgage banking system."
This is something you need to understand and understand well because if you don't, you are making a grave mistake about how all of this mess came to pass.
The banks didn't just decide to look the other way because of "big profits." They were forced by the government to hand out loans to people who didn't deserve them.
If what you are saying is true then why on earth did these "greedy" bankers wait so long to make all of this dirty money?
That doesn't even make sense.
Let's reframe this in the context of health care, which, next to financial ruin, is one of Americans' biggest nightmares.
What about those of us who have paid and paid and paid their health insurance premiums and suffered for it but are nowhere near death?
We will get nothing.
I suppose we could TRY to switch insurance providers and see if we can get a doctor to operate on us.
Under this plan those of us who have exercised regularly and stayed healthy will get nothing, and those who haven't will get "medical treatment".
How about if you've never missed a payment in 5 years you get a free colonoscopy twice a year?
When I read some of the comments, I believe that the point of our econimic crisis is being over looked. Alot of people had jobs when they signed to buy thier home. Now they don't.
My husband and I bought our first home last April. We had a decent down payment we had saved. He had a great job with overtime and benefits. I quit my job. We were moving closer to his job, and I planned on finding another job. All was well.
Then in October, he was laid off. He found another job 70 miles away, to be laid off 2 months later. I haven't found work yet, and staying home with my child who has Downs Syndrome.
The point is, we thought it was a good time for us to buy a house. We were wrong. As long as he recieves unemployment benefits, we won't lose our home.
The economy is the reason alot of people are losing their homes. Ofcourse there will always be irresponsible home owners who go into foreclosure. Our uncle, a realestate agent, encourged us to go with an ARM if that was the only loan we coudl get. We waited until we qualified for something better. I'm very thankful we have been fiscally conservative.
My heart goes out to people who are losing thier homes due to job loss or health problems. This is like kicking someone when they are already down. There should be some kind of help for these people.
OBAMA"S MORTGAGE PLAN IS A GREAT FIRST STEP. The refinancing part up to 105% of equity is a definite winner. The loan modification part will be a little more tricky but should also prove very successful.
CORRECT ME IF I AM WRONG on the refinancing phase.
IF YOUR EQUITY SITUATION meets the 105% criteria.
IF YOU HAVE A JOB.
IF PAYMENT MEETS THE PERCENTAGE OF INCOME.
THEN. YOU WILL BE ABLE TO REFINANCE AND KEEP YOUR HOUSE! AS I UNDERSTAND IT, ANYBODY WILL BE ABLE TO REFINANCE.
WHAT DOES THIS MEAN IN DOLLARS?
The payment for a $200,000 mortgage at 12% is $2057 per month. Refinancing at 4.5%, would make $1013 per month.
THE PAYMENT WILL BE $1050 PER MONTH LESS!
NOT ONLY MAY THIS PREVENT FORECLOSURE, but,
IT WILL PROVIDE EXTRA MONEY TO LIVE and STIMULATE THE ECONOMY!
For the benefit of those that have not been following the plan, THE 105% CRITERIA for obtaining refinancing means that if YOUR HOUSE VALUE is $200,000, the Obama plan will LOAN 210,000.
I think I have it right. Let me know because I am not a financial expert.
Forgive me for this addendum, but I forgot to mention that the
REQUIREMENTS OF THE REFINANCING PHASE of the OBAMA PLAN GIVES ALL INVOLVED A CHANCE TO RECOVER THEIR INVESTMENT
AT 105%, a DECENT RECOVERY IN HOUSING VALUES will give both the owner and the lender the opportunity to recover their investment.
THE OBAMA PLAN REALISTICALLY GIVES the GOVERNMENT, the OWNER, and the LENDER a good chance to RECOVER THEIR INVESTMENT by using the 105% CRITERIA.
There definitely is major culpability on the part of the lenders. Anytime I ( and most people I know) ever applied for a loan and the lender determined I was ineligible for financing (ie: debt :income ratio, poor credit), I was denied the loan. Isn’t that how it always worked- if you did not qualify, you were rejected. That method of operating changed on a massive scale and it facilitated borrowers getting loans they couldn’t afford, buying “investment properties” with no money down, and signing onto mortgages with byzantine terms. Compounding the problem, many homeowners genuinely have fallen on hard times simply because of the fallout of life problems in a poor economy.
The outrage and indignant self-righteousness by some with regard to portions of the stimulus “helping” out homeowners is unconscionable. If things get worse, these self-righteous people may be in need of a helping hand, too. Some of the morally outraged citizens who are opposed to foreclosure relief haven’t necessarily done everything “right” but have just been damn lucky. Perhaps homeowners who didn’t get overextended or didn’t refinance or cash out fictional equity are responding with such irritation because they don’t want to reward what they perceive as bad behavior. Much of the crisis is not solely a result of bad behavior by homeowners, but ironically because of bad behavior by the banks- many which have already been rewarded! Where was the outrage when the banks were getting bailed out?
Thanks Arianna!
Reading, and re-reading articles by well-versed writers, and listening and watching interviews with the experts on the banking/finance industry leaves me wondering about one question. Would it make sense to invest government dollars, not in the large failed- or close-to-failure banks, but in seeding and/or re-capitalizing regional, local banks?
My experience with regional, local banks is that they are much less engaged in risky models of financing, and more engaged in traditional banking models. For instance, here in Minnesota, Bremer Banks is one of the larger regional banks. Franklin Bank is a smaller, but well-respected local bank. Western Bank is another well-respected bank with only a few branches, but actively engaged in th elocal community. There is a small, regional bank up in Grand Rapids (Itasca County) whose CEO has partnered with the local community action agency and Lutheran Social Services to provide financial counseling to families who have been ill-affected by the banking crisis -- in part because those families could not get the risky loans from his bank, so went to the larger multi-national banks for the loans, but now those families are in financial trouble. The Grand Rapids bank's rationale for supporting these families? They're still his clients, neighbors, and some are even his friends; they deserve to be supported by their community.
Does it make sense to seed and re-capitalize local, regional banks instead of spending trillions on failed, or close-to-failed banks?
When I first heard that people had signed on the dotted line for a loan they knew they wouldn't be able to honor, I was way against their side of the story.
However, the banks owe a greater responsiblity, because they are the vechile permitting people to dig themselves into a hole they know the people cannot possibly get out of.
Just like teachers or prisons or property owners, legally the banks should be held to a higher standard of care, not just to protect the people from themselves, but to protect themselves, and now the entire population.
Both were wrong, now with the banks trying to take money from the government (us) and tell the government(us) what they are going to do with it, maybe its time to put the banks into the hands of the government, until such a time as the government can regulate what banks can and cannot do.
You are correct, in a mortgage contract both parties are not perfectly equal. A bank is an expert, at least we trust it to be. A borrower is not an expert; despite that we expect him or her to examine the contract skeptically. In this light, the theoretically free market is not perfectly free. We can see the current mortgage crisis as a result of this imperfection of the free market.
We can address this problem in two ways. We can declare the free market as inefficient and have the government to step into fixing troubled mortgages. This is the essence of the Obama’s proposal.
Contrary, the government may recognize that banks had unfair advantage in manipulating the homeowners. Subsequently, the government will use its power to correct this flaw of the free market. However, will do it not by limiting freedoms of banks in conducting their business (as proposed by Obama), but will do it by expanding freedoms of homeowners. It can be done by forcing banks to take the government loans to cover all the defaulting mortgage payments for the next six months.
This way, the government will stay as the guarantor of the constitutional freedom of enterprise.
Details of this proposal are here, http://www.huffingtonpost.com/henryk-a-kowalczyk/the-simplest-plan-for-hel_b_167642.html . In this concept, the government does not spend a dime, and does not need any new bureaucracy. Can someone explain to me what is wrong with this approach?
Sure, some people knew they couldn't afford the homes. Some even protested to the lenders that they couldn't..
My brother-in-law was a sub-prime lender and often talked about how they had to talk with families and convince them a raise in salary, a promotion, or some other income adding event would occur before the rate / payments went up. Often, the people were told they couldn't afford the house, but to buy it, live in it on the low rate / payment, and sell if in three years for enough profit to buy a home they could afford.
These guys were paid on commission and they 'sold' the mortgages with the same zeal and tactics as a used car dealer.
In my opinion, the ones that specialized in sub-prime loans should be banned from the banking industry.
Freedom of speech is a guarantee that every person has the opportunity to be heard. Silence gives a racist or rapist the opportunity to operate unmolested. But we must also have a well funded Justice Department that is always on the alert for violators of a person civil rights. It must be staffed by tens of thousands of our most liberal minded investigators. They should be given the freedom and time to dig deep and wide. Those depriving others of the right to: “Life, Liberty, and the Pursuit of Happiness” must be dealt with quickly and harshly. Major civil right violators must be hung by the Justice Department in front of shopping malls. Enough Is Enough!!
So are you opposed to The Fairness Doctrine?
Another disciple of Phil Graham, Tom DeLay, Dick Armey. Are all of you guys Rhodes scholars?
Thankyou - finally a voice of reason.
At the heart of civilized society and the American Dream is the ability to own a home. All the efforts to make this happen have been turned into a scam. Congress and Banks acted deliberately to place the burden on everyone but banks and mortgage lenders. It is still better for judges than bankers to make decisions about foreclosures in bankruptcy because they seldom have vested interest and understand their communities.
Congress has continually passed legislation to give banks more leverage against consumers who might possibly take the system. These banks in turn handed out credit cards like candy thinking they were insured by their new laws. Now we find those laws were really not the consumer taking the system, but the system taking the consumer. These new bailout measures don't make since because many people were forced to refinance at higher rates and use more equity. Now they find their equity was not there as well as they may be underemployed, have medical problems, a lousy credit rating, and are being forced out of their homes. Sadly, our Congressmen will probably embrace the same old tactics to accuse everyone and help virtually no one but themselves. The long term benefits of saving homes is much greater than all the worry about people taking the system. We just gave banks 800 billion and have the biggest single crook in history---Could helping out homeowners be any riskier than these representatives of fair play in the market place?
On Monday, I commented to this text, presenting a simple idea for helping homeowners.
Now, I put these comments into a formal proposal
http://www.huffingtonpost.com/henryk-a-kowalczyk/the-simplest-plan-for-hel_b_167642.html
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