If government foreclosure prevention isn't working, what is?

Friday, April 15th, 2011 

The Obama Administration’s attempt at helping homeowners, the Home Affordable Modification Program has faced criticism for failing to help as many homeowners as initially predicted. Treasury officials now expect the program to help up to 1.5 million homeowners — a far cry from the 3 to 4 million initially projected. So far, just over 600,000 homeowners have gotten permanent loan modications. Neil Barofsky, the special investigator who oversaw the bank bailout, called the program “a colossal failure.”

So if the program isn’t saving homes, what is? Advocates and policymakers talked about solutions from shoring up home prices to bankruptcy reform, changes to the foreclosure process and increased mediation Tuesday at the New America Foundation, co-sponsored by National Council of La Raza. Given that more than 1 million homes were foreclosed on in 2010, and analysts expect 2011 numbers to be even higher, the answers can’t come fast enough.

Sen. Jeff Merkley, D- Ore., who formerly worked with Habitat for Humanity, laid out his six-point plan to help stabilize the housing market. One element of Merkley’s proposal would make permanent a $5,000 tax credit for first-time homebuyers of modestly priced homes. The aspiring homeowners match the credit dollar for dollar, doubling their savings. The credit doesn’t just benefit the person buying the home, Merkley argued. More people being able to purchase raises prices, he said, giving some relief to homeowners whose equity has been decimated.

The $5,000 credit is a targeted supplement to homeownership’s main tax benefit: the mortgage interest deduction. But that helps people who have already managed to buy a home. The matching credit helps people take that first step, he said by underwriting the initial costs of buying a home — the down payment and closing costs.

“Show me a family who’s buying a $200,000 home and can afford to put $40,000 aside, and I’ll show you a miracle,” Merkley said.

That might help the people looking to get into a home but won’t do much for the people trying to keep one. For those homeowners already facing foreclosure, speakers recommended that banks identify a single point of contact for homeowners. Borrowers have reported endless problems of lost documents and miscommunication, making headway with one bank representative only to slip backward when their liaison changes. The single point of contact would, in theory, reduce the potential cracks for homeowners to fall through. Regulators announced just such an agreement Wednesday with 14 major servicers to establish single points of contact and compensate homeowners who may have been wrongfully foreclosed upon.

Another thing that might help homeowners: changes to bankruptcy law. Georgetown Law professor Adam Levitin suggested reforms of the law that would allow bankruptcy judges to adjust interest rates and even reduce principal on primary residences during proceedings — a provision already allowed for yachts and second homes. Referred to as cramdown, such a change was rejected by the Senate in 2009 under heavy lobbying pressure by the American Bankers Association. But the idea’s not completely dead. A group of state attorneys general are negotiating a settlement with major lenders that Republicans have criticized as “stealth cramdown legislation.”

Foreclosure mediation is yet another option for troubled homeowners, one that’s gaining ground. The number of states offering mediation programs doubled between June 2009 and June 2010.  Mediation can be a win for all parties, said Alon Cohen of the Center for American Progress. Speed is one factor — foreclosures can take 200 to 300 days while mediations take 100 days on average to complete. Mediation gives homeowners facing foreclosure more say in negotiating the terms of leaving their home and discourages vacancies that can affect entire communities, said Cohen.

That community impact of foreclosures is hard to pin down. But anecdotally the ripple effects are big and growing.  An estimated 2 million children were affected by foreclosure in 2008 and 2009. Several schools districts across the country report an uptick in homeless students. A 2006 study (pdf) found that each foreclosure within one-eighth of a mile of a Chicago single family home reduces the home’s value by 0.9 percent, further eroding property values in a community. That’s even before a home becomes vacant. In low and moderate income communities, the study found property values are hit twice as hard.

One community impact we do know: Communities of color have been particularly hard hit. A 2010 report (pdf) by the Center for Responsible Lending estimates the foreclosure crisis will drain $193 billion of wealth in African-American communities and $177 billion in Latino communities between 2009 and 2012.

The speakers at Tuesday’s event aren’t the only ones who have noticed the failures of the government program. Legislation to end the program passed the House in March, two years before its scheduled sunset. Whenever the program ends, however, it’s clear that more needs to be done to blunt the foreclosure crisis. Advocates hope some of the ideas put forth could be applied on a national scale. Bills in both the House and Senate would provide support for state foreclosure mediation programs.  Sen. Sherrod Brown, D-Ohio, introduced legislation (pdf) Thursday that would expand access to foreclosure prevention services; Rep. Brad Miller, D-N.C., has introduced a companion bill in the House.

“This foreclosure crisis affects all of us — homeowners, families, neighbors, and state and local governments,” Brown said in a statement. “We should be finding ways to keep people in their homes, not gouging homeowners and forcing more houses onto an already depressed housing market.”

What Went Wrong

Donald Barlett and James Steele are revisiting America: What Went Wrong, their landmark 1991 newspaper series, in a new project with the Investigative Reporting Workshop. Over the next year, the project team will examine how four decades of public policy has shaped America's ongoing economic crisis.

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The Betrayal of the American Dream on Google Books

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Check out the first chapter of Barlett and Steele's 2012 book here.