"We haven't yet found a way of dealing with this..." - Assistant Treasury Secretary Herbert M. Allison Jr. on home mortgage-loan modifications.
Early in his term of office, President Obama set the standard by which voters should judge his administration, saying it would be tested by how successful it proves to be in ending the nation's economic downturn.
Republican victories in New Jersey, Virginia and, more recently, Massachusetts, as well as the failure of congressional Democrats to pass health care reform legislation, all go to illustrate that voters are dissatisfied with the Democrats, whom they perceive as ineffective. The most stunning example of Democratic failure since President's Obama inauguration last year has been their inability to stop home foreclosures, which are projected to affect 19 million homeowners by the end of 2010.
In his recent State of the Union Address, President Obama made clear how he intends to resolve the home mortgage foreclosure crisis -- namely, by ignoring it. He offered no options for distressed homeowners, aside from their securing conventional mortgage loan refinancing at lower interest rates. However, because of the depressed housing market, millions of homeowners hold mortgage debts greater than the value of their homes; they are, as industry analysts describe it, underwater. Deutsche Bank had projected that 25 million, or 48 percent, of all homeowners will be 'underwater' in their mortgages next year. Furthermore, diminished home values make conventional bank refinancing impossible, because, sadly, the Federal government's TARP bank-rescue program was never intended to assist homeowners to modify their mortgage terms.
Otherwise, it is difficult to understand how the Obama administration expects the economy to recover, since high mortgage payments, when combined with declining home values, have further depressed the housing market that triggered the economic recession in the first place. Underwater homeowners are faced with a devil's dilemma, because they cannot afford their inflated mortgage payments, nor sell their homes at prices that will permit them to satisfy those homes' mortgage debts. This leaves homeowners with effectively two options: namely, resorting to so-called short-sales (i.e. convincing the lender to accept a loss when the home is sold for less than the mortgage owed), or, worse, foreclosure, which is a process that affects an owner's credit worthiness, similarly to legal bankruptcy. The result of all this is that millions of homeowners will not only suffer eviction from their homes, but also ruin their credit, which curtails their consumer spending and further damages the prospect of general economic recovery. Moreover, the economic ripple effects of foreclosures cause neighborhood home values to plummet while at the same time diminishing municipal tax bases.
So far, President Obama's Home Affordable Modification Program (HAMP) has assisted only 31,000 homeowners to modify their mortgages, whilst millions more remain on the brink of foreclosure. The President's meager housing efforts are faulty in their conception, since homeowners living in high-priced housing markets in states like California, Massachusetts and New York are ineligible for the HAMP program, since, according to the means test, they hold mortgages priced above the program's upper limit. President Obama's beleaguered housing strategy is perplexing, given that previous Democratic Presidents created successful housing programs. For example, Presidents Franklin Roosevelt and Harry Truman assisted millions of working-class families in achieving home ownership by creating the Federal Housing Administration (FHA) mortgage insurance program, as well as the FHA-VA program, which helped build military housing and assisted millions of returning war veterans to buy new homes. Although the homeownership rate fell last year to 67.3 percent, homeownership is still close to its all time high of 68.1 percent in 2001.
During the Great Depression era, only four in ten American households owned homes, and America was a nation of renters. In the 1940s, mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment, making mortgage terms difficult for most homebuyers to meet. The FHA encouraged lenders to create affordable 30-year mortgages, by insuring lenders against mortgages lost to default. The FHA has insured over 34 million properties since its inception in 1934. Furthermore, the FHA was also good politics, as working-class families who became homeowners remained loyal to the Democrats thereafter.
This lesson is not lost on all politicians. For example, Hilary Clinton, during her presidential nomination campaign, appeared to offer a bolder, macro-economic approach for solving the foreclosure crisis. Clinton supported the idea of placing a moratorium on all home foreclosures, to stabilize the decline of home values whilst encouraging lenders to modify mortgage terms to homeowners. Even Republican candidates such as John McCain got in on the act, promising to re-set mortgages to the lowered market-value of homes in order to assist underwater homeowners.
Inexplicably, the Obama administration has not fully utilized the FHA, and other programs like it, despite the fact that these programs have been used frequently over the decades to assist both homeowners and lenders overcome difficult housing-market challenges. Creative financing ideas abound about how to assist lenders to modify home mortgages, such as 'equity give-backs', which permit lenders to share in a home's appreciation when it is resold. Alternatively, there is the idea of having the FHA serve as the insurer of last resort (its current role), so as to protect lenders against losses that result from their modifying the terms of a homeowner's mortgage. In short, existing Federal programs work in partnership with lenders to assist homeowners escape mortgages they can no longer afford by transitioning them into a new housing situation, without having to resort to obnoxious public policy solutions such as default, foreclosure, or bankruptcy, all of which can only further imperil the recovery.
Sadly, the Obama administration has left distressed homeowners with few alternatives. This will make it difficult to solve our current economic downturn, because, as in the last Great Depression, housing construction jobs have disappeared in the depressed housing markets. It is bad enough that President Obama and a Democratic Congress failed to pass even a weakened version of health care reform. If the home foreclosure crisis continues unattended, it will transform the stream of Republican state-wide victories into a tsunami of voter discontent headed directly towards the incumbents in Washington DC, namely, President Obama and congressional Democrats.
William K. Barth is a California attorney who holds a doctorate in politics from the University of Oxford. Dr Barth worked for the US Department of Housing and Urban Development from 1994 to 2002. He writes a blog on the Huffington Post.
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There are millions of folks out there who have saved their hard-earned money for a home. Should they be denied the dream of home ownership because we need to prop prices up high? In many areas the home prices are still too high for local salaries. Prices need to come down. Deflation is the cure for this inflationary bubble.
Congress can pass an amendment to Chapter 13 that will allow borrowers to propose affordable modifications to the loans on their primary residence subject to bankruptcy court approval. There's no good reason why it cannot or should not be done for borrowers trying to save their own home. People with means can do it on their vacation homes and investment property . Yet, both sides of the aisle are unwilling to change a law that seemingly favors a different class of borrower.
HAMP is not working - at least not well. There are no good solutions out there for borrowers. Yet there's an awful lot of Washington rhetoric that suggests they remain "hopeful."
If Washington is not going to give us meaningful mechanisms to help people keep their homes, it should just fess up and admit that we're on our own. I'd rather help my clients accept that their leaders choose to remain impotent in the face of the home foreclosure crisis, then be an accessory to exposing them to more false hope.
Thank you for these well reasoned and crafted comments. Yours is a suggestion that the administration initally supported, but then failed to help Congress enact into law. It would certainly provide at least one alternative that would work for underwater homeowners.
I tried to take a slightly different tact by suggesting that bankrupcy & foreclosure are not the best policy remedies. Instead, I propose some kind of FHA-style (mortgage insurance) solution to support lenders who provide loan modification relief to homeowners. FHA was started during the last Great Depression and surely we can revitalize it yet again to solve this terrible problem.
Its hard to believe that the administration would abandon 19 + million homeowners and tell them they are on their own. To do so, as I suggest in my article, would destroy public confidence in this administration.
Thanks again for your comments.
William Barth
Many people purchased or mortgaged 1st, 2nd and 3rd homes at the height of the market and have or are considering walking away. They took a risk and lost. Many are still holding cash. I am because I refinanced at the height of the market. If I walked away i would be ahead of the game a touch. I think it's fair to multiply my refinance by millions. Most people at the height of the market put almost nothing down. What are they losing by going to cheaper rental abodes? Of course if you give them free time without rent they'll take it. I certainly will, if foolishness like that espoused in your article becomes law; I'll stay in my weekend home if i don't have to pay; now I'm throwing money away.
The only sympathetic people are those that lost jobs and bought 7 years ago or more. Nothing has been done for similarly situated people for 80 years. Why did they suddenly get on your radar screen? The reason nothing has been done is because nothing can be done that won't make our "macro-economic" situation worse and ultimately reduce lending and push people out of jobs - the economic bottom line in this.
I guess you're thinking like a lawyer - that is your advocating for a client, or grinding an axe, or whatever. You're certainly not telling the other side of the story as if a policy person.
It sounds wonderful, this doing the right thing, but if you were to take a look at the details of this entangled mess and the political consequences mass modifications you'd rue the day.
For example, one home owner may have a first lien note and a second lien note, both of which have been securitized. The mortage notes were stripped into principal and interest tranches and sold to different secruitization pools with separate cusip numbers. The trustee for the security has the legal responsibility, (but you're an attorney... you know how clue-less trustees are) that is assigned to a servicer who manages the cash flow and remittances with a slice, a priority slice (right?) for their quid pro quo for services rendered. And you think a government "plan" is going to come in and save the day with this entire cast of interested owners? Then there are the foreclosure attorneys and who, pray tell, pays them? (you know as well as I, it is the servicers and they have a priority)
The last point for you: how do you modify a loan or loans secured by a persons home with modification forms that will conform to trustee agreements with prior requirements specific to this thing e.g. how will the interest only tranche like having interest cut in half while principal remains 100%?
I have a sneaking suspicion that Dr. Barth lives in California and he's upside down on his mortgage like so many others are here.
Too many people bought houses they couldn't afford using no document "liar" loans and putting very little or nothing down. Having watched HGTV endlessly and listened to their real estate agent and their highly leveraged friends they came into the deal figuring they'd slap on a coat of paint, put in some new flooring and window coverings, granite counters and stainless steel appliances and they'd flip the place in two years taking their tax free capital gain windfall and plowing it into another "fixer". Their mortgage is an Alt-A or Option ARM which guaranteed them "affordable payments". Since real estate "always goes up", they didn't even worry about whether they could make the full mortgage payment. They'd be long gone before the mortgage reset. They'd be RICH in no time at all!
Now that it's not working out they want the government (taxpayers) to come to their rescue.
Too bad, so sad.
I know FOUR families in foreclosure. All lived well within their means, bought homes they could afford, did NOT finance them using "sub-prime" mortgages. All four put reasonable down payments, and did not borrow against equity. All have excellent credit history.
Three lost their jobs. Tried to get extensions or relief on terms. No deal. The fourth had an illness and got stuck with huge medical bills (and was insured too!). He's a contractor and is currently earning 1/4 of his usual income. Their house has lost 50% of the original state assessed value of the property. They owe more than it's currently worth. They're willing to stay in it, but can't get relief of any kind, payment reduction or refinancing. No deal.
These are not "irresponsible" people. These are average americans having their homes taken by the same banks that helped create conditions that led to these foreclosures.
Sure, lots of people bought when they shouldn't have, "used" the easy loans. Plenty of banks suckered people into bad loans that almost assured they'd get to take the property for a song down the road.
But TODAY, we have millions of reasonable, responsible people facing this crisis. Let's make it easier for them to keep their homes. Why do you have a problem with that idea?
Thank you for taking the time to comment. You are referring to the so-called moral hazzard in helping underwater homeowners.
The truth of the matter is that borrowers who over-leveraged themselves by buying houses, or taking-out mortgage loans that they could not afford, should not be permitted to earn a wind-fall through a new, Federally insured, loan modification process. I do not advocate, nor support, such an outcome. Rather, the loan modification process could easily build in safeguard's such as equity give-backs, and other innovative solutions, to prevent such unfair results.
We must remember that this problem affects not only the entire housing market, but also the macro-economy. In the end, we need to find solutions that can stablize the housing market without providing the unfair result about which you correctly warn us.
Thanks again for taking the time to comment on my blog.
William Barth
The truth of the matter is that borrowers who over-leveraged themselves by buying houses, or taking-out mortgage loans that they could not afford, should not be permitted to earn a wind-fall. Instead, a newly revitalized, Federally insured, loan modification process could easily build in safeguard's such as equity give-backs, and other innovative solutions, to prevent such unfair results.
We must remember that this problem affects not only the entire housing market, but also the macro-economy. We need to find solutions that can stablize the housing market without providing the unfair result you correctly write about.
Thanks again for taking the time to comment on my blog.
William Barth