No less an expert than Joseph Stiglitz, Nobel Prize-winning economist and president-elect of the International Economic Association, has concluded that that there is a real answer to the foreclosure crisis: Principal reduction. Forcing banks to write down the principal of troubled loans is, as Stiglitz told the Sacramento Bee, the "best option for the country... For banks, it means coming to terms with reality, with the fact that they lent money on the basis of prices that were inflated by a bubble. It ends the fiction that they will get repaid the full amount lent."
The band-aids that have been tried thus far just aren't working.
Susan and Robert Gerke, profiled by the San Francisco Chronicle on Thanksgiving Day, know that too well. They thought they had survived a combination of health crises and a recession-induced drop in income and would manage to keep their home. They worked with their bank to set up a loan modification under the government-sponsored Home Affordable Modification Program (HAMP), made 11 trial payments, stayed in touch with the bank and generally did all that was asked of them.
But this fall the Gerkes were notified that their home is scheduled for foreclosure Dec. 29. They were denied a permanent modification because, unlike many troubled borrowers, they actually have some equity in the house.
Prompted by the Chronicle's inquiries, the lender is reviewing the situation and may relent. But the Gerkes' plight underlines the utter failure of the voluntary HAMP program to help families battered by unforeseen circumstances -- most of whom aren't lucky enough to get a major newspaper interested in their plight -- stay in their homes. A burst of publicity may help an occasional family but doesn't change the overarching problem: At every step of the process, the benefit of the doubt goes to the lender or loan servicer, not the borrower struggling to keep a roof over his or her head.
We have to do better -- and quickly.
HAMP's failure was outlined by Neil Barofsky, inspector general overseeing the government's bank bailout, in congressional testimony last April. He explained that "the home foreclosure crisis has not abated; indeed, the situation has continued to deteriorate since HAMP's rollout."
Often, he testified, HAMP actually leaves struggling borrowers worse off, as they "end up unnecessarily depleting their dwindling savings in an ultimately futile attempt to obtain the sustainable relief promised by the program guidelines." Not only do they often get the rug pulled out from under them after months of struggle, they commonly face devastating back payments and penalties that suddenly become due.
As I noted last week, a massive tide of foreclosures is coming -- foreclosures that will have devastating effects not just on the millions of families that will lose their homes, but on entire neighborhoods and ultimately our whole economy. It's time to admit that HAMP hasn't worked and start providing real relief to struggling families.
Disclosures this fall of massive irregularities in foreclosure documents -- often casting doubt on who has the legal right to foreclose on delinquent mortgages -- led The Greenlining Institute and others to call for a complete moratorium on foreclosures. With foreclosures halted, there would be time to sort out the mess; more importantly, the pause would make it possible to put in place a program of real relief based on principal reduction. But pretty much the entire Washington establishment has resisted, including key Obama administration officials.
Without principal reduction, we'll see millions more foreclosures. And, contrary to the bizarre arguments put forth by Treasury Secretary Tim Geithner and others, that won't stabilize communities, it will destroy them.
In many cases, the present situation pushes borrowers to walk away from their homes in what's called a "strategic default." If you owe $250,000 on a house that's now worth $150,000, making those inflated payments may make no sense, despite the hit on your credit rating a foreclosure would cause. Homeowners who might tough it out if they felt economically secure have little reason to do so if they have to choose between making those inflated mortgage payments and feeding their kids.
This is crazy. It helps no one for homeowners, often caught in the middle of circumstances they couldn't foresee or control, to do all the suffering and carry all the burden. Tell Secretary Geithner and the White House that we can't wait any longer, that it's time for a foreclosure moratorium and principal reduction program now. The Treasury comment line is 202-622-2970, then press #1 and leave a message; the White House comment line is 202-456-1111, and you get to get to talk to a live operator.
Follow Preeti Vissa on Twitter: www.twitter.com/Greenlining
http://www.nakedcapitalism.com/2010/12/treasury-bars-use-of-tarp-funds-to-help-borrowers-facing-foreclosure.html
1. Determine if the loan was in any way fraudulent. If the borrower committed any fraud the foreclosure should go through. If the loan originator committed fraud or the borrower was steered into a bad loan when they qualified for a better one, the mortgage should be voided, the house re-appraised and a fixed rate mortgage given at competitive interest.
2. If the mortgage is perfectly legal and documented, the principal balance should be modified as a fixed rate loan based on a current appraisal. If the house is worth less than the principal of the loan, the borrower should be required to pay back 50% of any equity to the bank to cover a portion of the old mortgage deficit if the house is sold within 7 years. This gives both bank and homeowner a 50% ownership of the problem.
3. Any foreclosure resulting from job loss or illness should never be reported to any credit reporting agency. This would allow an individual to get back on their feet more quickly if/when the economy does turn around.
Geithner also has refused to prosecute the banks and others who have been proven to have used fraud in foreclosure proceedings.
If the government would have let the Bankers go out of business ... then the government could have let the people lose their homes to foreclosurÂÂe.
But the government can't use taxpayer money to save the very people that caused this crisis ... and not help the taxpayers.
This position is indefensibÂÂle.
The people are smart ... they know they have been sold out ... they know they have been used ... and they know they have been abandoned by our government.
And that includes Barack Obama.
There are 20,000,000 potential families facing foreclosurÂÂe across this nation.
Remember too there are investors holding those mortgages. Do you want to screw them?
If the gov't would take over the 12 million+ problematic mortgages from 2003 - 2008 that the banks are trying to unload, strip them to current market value (this is easy to determine) and reconstruct the mortgage to 0-2% interest (depending upon the amount of bank fraud) for 30 yrs., that would generate about $10 BILLION a MONTH in revenue to share with the unpaid investors based on an average mortgage of $900 a month. Do the math, think about it - there are 66 MILLION mortgages in MERS - most are likely defective loan products. Do a recall - take the income - American homeowners and the economy will be grateful.
The banks cannot, and never intended to, hold on to these toxic assets. Take over the mortgages - Wall Street has already been paid by the investors. And the investors may have been paid by insurance.
There may of course be a lot of legal or commercial restrictions on the ability to do this or the value of this, but during negotiation everything is on the table. My point is that I hope that creative workable solutions that may be out there are not being ignored by the comfort of tradition.
So, we instead are choosing to be cold this winter and eat a lot less.
Thank you, Obama!