Secretary of the Treasury Geithner’s failed advice to the President Obama on how to solve the foreclosure crisis has apparently caused the president to reconsider prevention options.
As a HUD-approved counseling agency serving more than 5,000 homeowners in distress, we have come to some conclusions.
The first thing the president must do is terminate the Hamp program since it has been an extraordinarily unsuccessful effort, particularly in the context of the initial hype that claimed it would help four million homeowners in distress.
At present, only 600,000 families have permanent loan modifications and this number is rapidly declining due to continuing unemployment and declining home prices.
Hamp is also a lightning rod for Republican opposition, if not mockery.
Second, the president should develop a bipartisan proposal to encourage or compel (through a vast array of regulatory sanctions), the major servicers to fundamentally reexamine the problems facing the financial industry, the economy and homeowners in distress.
There cannot be a bailout of the homeowners through principal reduction. The cost of such could easily exceed the one trillion dollar estimates made by the CEOs of Chase, Wells Fargo and Bank of America given the continuing instability of home prices.
To create any ambitious and successful foreclosure resolution program within the narrow confines of Treasury is likely to be a failure based on past history. We therefore suggest that the president immediately appoint just-retired FDIC Chair Sheila Bair as his “anti-foreclosure and future homeownership czar”. She can jumpstart any efforts the president supports since she is highly knowledgeable and implemented the only effective regulator solution, despite apparent Treasury opposition, at the former IndyMac. And, she is likely to have full bipartisan support. But, most importantly, Ms. Bair has demonstrated her fierce independence and courageous thinking.
The anti-foreclosure czar might consider a few “outside-the-box” ideas:
Removing the authority of HUD to limit the effectiveness of HUD-approved home counselors, such as denying them payments for being effective advocates for the homeowner.
Adequately funding HUD-approved home counselors to explore any option that works for the homeowner. This could include swift “graceful exit” strategies supported by the banks as opposed to efforts that compel homeowners to fit within the narrow prism of loan modifications that generally do not work. This could be achieved by an independent allocation of the $3.5 billion from the $28 billion in unspent funds previously authorized to assist homeowners in distress.
Require foreclosed properties that are not in the process of sale to be made available for rental. This could include rentals at fair market value with an appropriate management fee for the servicer. Fannie Mae and Freddie Mac alone have more than one hundred thousand homes in any given month that are theoretically available for rental. Preference could be provided before foreclosure occurs for the homeowner to become a tenant. The tenant will then have with the option to repurchase the home once credit is restored and sufficient funds have been saved for a down payment.
Where the servicers are unduly uncooperative, the HUD-approved home counselors should have the option to encourage the family to put their monthly payments into a savings account rather than make payment to the servicer and, where necessary, eventually “walk-away.”
The Durbin bankruptcy bill, which President Obama supported on the campaign trail, but did not support when it came to a vote before the Senate, should be resurrected.
There is no clear road map today to solve the foreclosure crisis. A collaborative all agency approach has not worked and Hamp has been embarrassingly unsuccessful. Further, neither the public nor Congress, including most members of the Democratic party, have confidence in the leadership of Treasury, the GSEs, or HUD.
It is therefore time for the president to take a brisk stroll to Pew Charitable Trusts, where Sheila Bair will soon be a senior advisor, and ask her to again serve our country. Although she may not wish to be Secretary of the Treasury when Geithner departs, her entire career has prepared her for the independent role of anti-foreclosure and future homeownership czar. Hopefully, she will accept.