Even with Friday's good job numbers, the United States faces high long-term unemployment for years to come unless something changes soon. With Congress unable to do anything more ambitious than ban its members from insider trading, the last best hope for getting Americans back to work is to allow a significant number of the more than 10 million homeowners who are underwater to refinance their mortgages at the current value of their homes.
This requires the big banks that crashed the economy to come clean on the true worth of the assets they own. Large-scale principal reduction is a win-win for homeowners and the economy. It would stabilize housing values and prevent foreclosures, while putting cash in the wallets of struggling families whose spending is essential for creating jobs. Most economists agree that the housing market and broader economy won't recover as long as one-out-of-every-four homeowners with a mortgage are underwater.
Wall Street executives have fought against principal reduction because it would reveal the true weakness of their institutions. The CEOs of Bank of America and the other big banks know that underwater homeowners are more likely to default on their mortgages and that the endless flow of foreclosures will keep the housing market in the tank for years. But they've been happy to string families along, sacrificing the long-term health of the economy and their own institutions to prop up share prices and keep bonuses flowing.
Until recently it has been easier to see the need to get families out from under massive mortgage debt, than to find the path for accomplishing this goal. But that is changing. Three puzzle pieces have begun to fall into place that could together reduce the debt owed by underwater homeowners by more than $300 billion (roughly the amount of owner-occupied underwater debt serviced by the five biggest banks that make up 60 percent of the mortgage market). Whether this happens may ultimately depend on a personnel decision sitting on President Obama's desk right now.
The first piece of the puzzle began to take shape 13 months ago in Des Moines, when homeowners and clergy from 12 states traveled to Iowa to meet with Iowa Attorney General Tom Miller, who has been heading up a multi-state settlement talks with the banks on mortgage fraud. These groups, organized under the banner of The New Bottom Line, ignited a grassroots campaign to press the state attorneys general to make principal reduction the central remedy in any settlement.
Next week the Obama Administration and Attorney General Miller are expected to announce a deal with the big banks. The agreement will deserve the fierce criticism it receives for letting Wall Street off too easy and not doing enough to help those who were most victimized. The estimated $17 billion in principal reduction under the deal is pitifully small -- a mere 3% of all negative equity. Without the fierce advocacy by grassroots organizations and the leadership of state attorney generals such as Kamala Harris in California and Eric Schneiderman in New York, principal reduction would have been even more of an afterthought.
But as weak as it is, the settlement opens the door to principal reduction on a much larger scale. But the only way this can happen is if the releases in the servicing settlement are airtight -- only releasing the banks from behavior related to robo-signing and nothing else. That way the robo-signing settlement is just phase-one of a much more aggressive investigation of misconduct in how mortgages were made and bundled, and a far bigger settlement.
The second piece of the puzzle is the growing pressure directly on Bank of America, Chase and Wells Fargo to write down the bad mortgage debt on their books. Community, faith and labor groups delivered letters last week to each of the big banks demanding action on principal reduction. They announced a campaign of direct pressure that will culminate in hundreds of homeowners and faith leaders entering big bank shareholder meetings in April and May to bring bank executives face-to-face with the housing crisis.
Some smaller mortgage servicers like Ocwen have already begun to write down the principal on loans they service. Doing so makes good economic sense because it costs less to reduce principal than eat the huge expense of a foreclosure. And it's smart public relations. It turns out that running the world's largest foreclosure mill isn't very good for your brand, as Bank of America CEO Brian Moynihan must understand by now.
The third puzzle piece is named Ed DeMarco. He is a government bureaucrat and Bush Administration hold-over, who is the acting director of the Federal Housing Finance Agency, which manages Fannie Mae and Freddie Mac, the behemoths that own hundreds of billions of dollars in mortgage debt. DeMarco is legally required to use his powers to prevent foreclosures, but has repeatedly sided with Wall Street over ordinary homeowners. He has said that under no circumstances will Fannie Mae and Freddie Mac reduce principal on loans they own. This has allowed the big banks to hide behind his skirts.
Even the U.S. Treasury -- no great friend of the American homeowner -- has privately criticized DeMarco for taking this extreme position and making basic mistakes in his analysis, as have many housing experts and Members of Congress. It may sound surprising, but allowing underwater homeowners to refinance at the true value of their homes would save Fannie Mae and Freddie Mac -- and ultimately taxpayers -- more than $20 billion by keeping more people current on their mortgages.
To pour fuel on the fire, last week ProPublica and NPR reported that under DeMarco, Freddie Mac had increased fees to make it harder for homeowners to refinance, while taking out bets on Wall Street that pay off if fewer homeowners were able to refinance. DeMarco has argued that the two decisions were not connected. But even if that were true, there is no question that he has thumbed his nose at the law that requires him to maximize assistance for homeowners to minimize foreclosures. Why do we have someone running this key agency who is allowing Goldman Sachs-style speculation at the expense of homeowners and taxpayers on his watch?
President Obama tried to replace DeMarco last fall, but was stymied by Alabama Senator Richard Shelby. The next move for the President is to make a recess appointment or appoint someone who has already been confirmed for another position by the Senate. This will take courage. Ever since President Obama announced his foreclosure prevention program in the second month of his presidency he has been attacked by Conservatives for helping undeserving homeowners. Three years and 7.5 million foreclosures filings later, it is clear that almost every American homeowner has a stake in an aggressive program to write down mortgage debt and stabilize housing prices. It's time to side decisively with homeowners over the big banks.
The ball is in your court, Mr. President.
Gordon Whitman is Policy Director of PICO National Network, a network of 60 local and state faith-based organizations and more than 1,200 religious congregations organizing to improve life for working people in the United States. PICO is a member of The New Bottom Line, an alliance of community, homeowner and faith groups that have joined together to hold Wall Street accountable for the economic crisis and develop an economy that works for all families and communities.