The American Banker
The Center for Responsible Lending contends that within the next five years there will be thirteen million additional foreclosures, plus the almost five million since the recession began. Yet, President Obama in his 71-minute State of the Union address puzzled home counselors across the nation by failing to mention, even fleetingly, the growing foreclosure crisis.
As a result of mounting criticism from community groups and some Congressional leaders, the President recently made an announcement with Senator Harry Reid in Henderson, Nevada that he would support a creative, albeit grossly underfunded, homeowner relief program. It provides for 1.5 billion dollars to address homeowners deeply underwater and/ or unemployed in five of the hardest hit states: California, Florida, Michigan, Arizona and Nevada.
Many believe this will be sufficient for Nevada’s over 100,000 families facing foreclosure, but hardly sufficient for the 1.5 million families in California who could face foreclosure, much less those in the other three designated and distressed states.
Our HUD-approved nonprofit counseling intermediaries focus on and serve three of the five hardest hit states, Florida, California and Nevada and will be urging the President, Congress and regulators to take a number of additional actions consistent with the Presidents’ campaign promises.
Our suggestions are in the context of a failed HAMP program. This program has so far produced only a 3% permanent home modification rate among the expected four million home owner beneficiaries (116,000 permanent modifications). This failure has occurred, despite 75 billion dollars in federal subsidies to the servicers to modify loans for homeowners in distress.
In accordance with the President’s campaign promises, we urge strong support for Senator Durbin’s bankruptcy reform that would provide judges with authority to substantially reduce principal amounts. We will also advocate for the major foreclosure moratorium the President raised during his campaign and have it apply to all homeowners who have lost their jobs since January 1, 2009.
Consistent with the President’s campaign praise of Main Street community organizers, we will seek to have the Administration match the recent 1.5 billion dollar foreclosure program designed mainly to assist Nevada by allocating 1.5 billion dollars in unused TARP funds to HUD-approved home counselors, the true community organizations protecting embattled homeowners. This amounts to approximately one thousand dollars each for 1.5 million homeowners most likely to be saved by effective home counseling. (This is only half the two thousand dollars the Administration is presently providing as incentives for servicers to accept short sales.)
To further encourage principal reduction, we will be submitting to the President a plan to reduce principal to the fair market value of homes where families are underwater with a unique provision to allow servicers to recover half or more of any future appreciation. (The servicer percentage would depend, in part, on how deeply underwater families are.)
As counselors, we do not advocate that the 4.5 million homeowners deeply underwater just “walk away.”
However, a growing number of experts are recommending this remedy. This is a remedy that many wealthy investors exercise when their investments go sour. This recently occurred when Tishman Speyer walked away from its 4.4 billion dollar debt in Stuyvesant Town, New York.
To minimize homeowners “walking away,” we also urge the administration to:
- allow homeowners deeply underwater to remain in their home as a tenant with a future option to repurchase. Fannie Mae and Freddy Mac are developing such models, although they are not yet comprehensive enough to effectively address the problem;
- consider the GSE models of working with HUD -approved nonprofit counselors to directly assist the borrowers. With appropriate financial support, comparable to what is provided to the servicers, we are confident that home counselors will well exceed the embarrassingly low 3% permanent loan modification record of servicers; and
- -GSE’s have data that many banks took advantage of borrowers and are returning these predatory mortgages to the originators. The President should require that this information be made available to borrowers so that they can negotiate or renegotiate fair loan modification plans.
The public and Congress have been very supportive of Paul Volcker’s reemergence as the President’s leading financial institution advisor. Perhaps the public would be similarly pleased should the President, in considering these options, consult with Main Street’s champion, Sheila Bair. (The FDIC’s principal reductions and use of HUD-approved home counselors has so far been the only even partially successful administration model.)
Founder and CEO, Mabuhay Alliance