David Coates

The Foreclosure Crisis

The 2009 story of the Obama Administration response to the foreclosure crisis is given below: but first, this 2010 update, pointing to the very genuine danger of a second wave of foreclosures to come.

• Evidence continues to build that the Obama program (details of which are below) helped very few homeowners in difficulty in 2009, and where it did, may even have compounded their problems. Only a third of those who successfully completed the trial period of mortgage modification financed by HAMP money have so far been offered permanent relief (data from The Huffington Post, Match 10, 2010): 180,000 people from a pool three times as large, a pool which is tiny compared to the 3-4 million homeowners who in principle could benefit from the program.
• Evidence continues of people walking away from their mortgages even though they can afford them, because without any modification to the size of their mortgage, even if they pay it off, they will remain massively in debt: having bought at the top of the price boom, and now facing prices well below their purchase price. (For details, see http://www.alternet.org/story/145551) Maybe one homeowner in five is currently stuck with negative equity (is “underwater”) in a year in which the percentage of Americans owning their own home (67.3%) was the lowest for a decade.
• Sales of newly built homes fell in January 2010 to their lowest level in 5 years., even though the tax credit given on new purchases continues through to the end of April 2010. Currently “there are an estimated 7 million homes empty…and an estimated 7.7 million houses and condominiums behind on their mortgage payments.” (The Financial Times, March 5, 2010)
• A foreclosure crisis on retail and office buildings is also building, threatening the viability of many smaller community banks nation-wide. A half of all commercial real estate mortgages could be ‘underwater’ by the beginning of 2011, according to Elizabeth Warren, chair of the Congressional Oversight Panel monitoring the financial bailout (cited in The Washington Post, February 19, 2010).
• Meanwhile the rules governing Fannie Mae and Freddie Mac have actually tightened – the Federal Housing Finance Agency, their regulator, reportedly proposing a ban on the GSEW’s using subprime loans and second mortgages to meet government-mandated goals for helping low-income Americans buy their home (this, in The Financial Times, February 18, 2010).
• Though the Treasury has been repeatedly lobbied to change the terms of HAMP, to enable homeowners to reduce the principal they owe, that lobbying was slow to be effective. Prior to March 26, t=he only innovations in policy since HAMP were minor – particularly a new scheme, due to start April 5, to allow sellers to sell for less than they owe, and to give them (and the banks they owe money to) a small financial incentive to do so. Add to that – for the five worst hit states (Nevada, Arizona, California, Florida and Michigan) a new $1.5 billion program, announced by the President in late February, allowing states to use money to pay the mortgages of unemployed homeowners, at least temporarily. To that date, as the New York Times editorial put it (March 1, 2010):

“The administration’s anti-foreclosure program, which subsidizes lenders to rework bad loans, has been a big disappointment. One reason is that its usual method of modifying loans – lowering the monthly payment by reducing the interest rate – does not work well for jobless and underwater borrowers. Unemployed homeowners often cannot make even reduced payments and underwater borrowers need principal reductions to succeed over the long term, not lower rates.”

Then the penny seemed to drop, and the administration did make a significant readjustment in policy. Thank goodness and at last both the Obama administration and the leading bank in the mortgage business (the Bank of America) introduced schemes that allowed mortgage owners “under water” to reduce the principal owed on their houses
The Bank of America announced a small ;pilot scheme allowing up to a 30% reduction in principal owed, with the 30% written off in 10% tranches on an annual basis if mortgage payments were maintained
The Obama administration announced a scheme (March 26) to allow unemployed homeowners to reduce or eliminate mortgage payments for a six month period, financial incentives to lenders to reduce the principal on a mortgage if the amount is more than 15% of the house’s current value, and new moves by the FHA to help struggling honeowners refinance to a more affordable loan.

And only just in time! The number of homeowners facing foreclosure rose by a quarter million in the last 3 months of 2009, according to new government data released in March (see The New York Times, March 25)

How we arrived at this point is best understood by telling the story of the housing policy in 2009

David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.

He writes here in a personal capacity.

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