Help Now, Not Later

A real public-private partnership to assist homeowners in peril of foreclosure is achievable in short order, and there's no time to lose. By John Taylor

John Atlas and Peter Dreier in “Stemming the Red Tide” are right to emphasize the pronounced regulatory failure that led the country into the current foreclosure crisis. The National Community Reinvestment Coalition (NCRC) and its allies have frequently made the case that financial regulation needs to be modernized to ensure that consumers are adequately protected. Now, no less an authority than the International Monetary Fund (IMF) has recognized this failure. Managing director Dominic Strauss-Kahn told the Davos Forum in January that poor financial regulation and supervision in the United States caused the subprime crisis, calling for a “serious response” not solely based on monetary policy, according to the Financial Times.

Atlas and Dreier put forth solutions that many of us can agree make good sense: enacting strong anti-predatory-lending legislation; improving regulation of the financial markets; strengthening nonprofits and expanding their capacity to assist homeowners facing foreclosure. But the magnitude of the problem suggests that even broader, more immediate solutions are necessary.

We have seen it before: As the economy dips, the media hotly debate whether or not we are in a recession and economists offer the classic definition of a “recession” as being two consecutive quarters of a reduction in the GDP. For most working-class Americans, these econometric discussions are irrelevant. People see the foreclosure signs and they hear of their neighbors’ struggles. They know their wages stagnate while their living expenses continue to rise. They are worried, with good reason, official recession or not.

More than two million working Americans have already gone into foreclosure or will do so in the coming months. It is worrisome, although it comes as no surprise, that the national homeownership rate has taken its largest one-year drop ever, losing 1.1 percentage points over the past year, according to the latest figures from the U.S. Census Bureau, as reported by CNNMoney.com.

But despite early warnings, administration officials were slow to respond to the gathering storm. Now that the magnitude of the problem has become clear, they have put together piecemeal remedies that do not approach it in a comprehensive way.

Current efforts rely heavily on limited modifications and payment plans that do not move families into long-term affordable mortgages. Rather, they shift the problems into the future. Refinancing loans would be an option, but inflated appraisals and declining home values have left many homeowners with no ability to refinance. The unsuccessful results from limited modifications are clear: According to the Mortgage Bankers Association, fully 40 percent of subprime adjustable-rate mortgages (ARMs) that went into foreclosure in the third quarter of 2007 were loans that had previously experienced a modification or repayment plan.

Many problematic loans facing foreclosure need to be restructured to meet the borrower’s ability to repay. But restructuring loans is not an easy process. Most have been packaged and securitized by Wall Street and put in CDOs (collateralized debt obligations) that are then sold as packages of loans to investors in the United States and worldwide. Laws protecting investor rights require that he/she give permission to the loan trustee to allow it to be restructured. This is a formidable hurdle that has significantly slowed loan modifications; even if an investor is willing, the process can take weeks or months.

To get past the hurdle presented by voluntary loan modifications, the NCRC, which also runs the National Homeownership Sustainability Fund (NHSF), a nationwide foreclosure-prevention program, has developed a proposal called the Homeowners Emergency Loan Program (or HELP Now).

The Homeowners Emergency Loan Program (HELP Now)

Faced with a major foreclosure crisis resulting from the economic turmoil of the Great Depression, the federal government responded in 1933 by creating a housing finance agency, the Home Owners Loan Corporation (HOLC). A similar entity, the Resolution Trust Corporation (RTC), was established in the 1980s to aid in the clean-up of the failing savings and loan industry. Although these institutions fulfilled their missions, the creation of a similar entity to respond to the current mortgage mess could take more than a year to accomplish, given the time required to approve, fund, staff, and create programs for a new agency. The immediacy of the crisis does not allow that luxury of time.

Create a Program, Not an Agency

NCRC has developed a proposal to immediately respond to the crisis, recommending the creation of a three-year recoverable loan program, the Homeowners Emergency Loan Program (HELP Now). It would build on the HOLC model, but rely on existing institutions such as the U.S. Department of the Treasury, FHA, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, or the Federal Home Loan Banks to purchase outstanding loans, provide financing, or insure loans. By avoiding the added time that would be required to create and staff a new agency, HELP Now could potentially become operational immediately.

Under the program, the federal government would offer to purchase, at a discount, loans held in securitized pools. Discounting the purchase of loan pools would strike a balance between assisting homeowners and ensuring that lenders, servicers, and securitizers are not rewarded for financing and servicing predatory loans. Once held in portfolio by the federal government, the loans could be restructured in a meaningful way to create long-term affordability, or refinanced.

Use the Private Markets to Refinance Loans

Borrowers requiring refinancing would be allowed to refinance their loans through private lenders based on standardized underwriting criteria that would include consideration of a borrower’s ability to repay the loan and the accurate value of the home. Loans underwritten by lenders could be sold to Wall Street or the GSEs for securitization.

Government Is Paid Back

The discounted value of the home (the difference between the value of the current mortgage and the new refinanced mortgage) would be reflected in a lien, in the form of a soft-second (guaranteed, subsidized, forgivable) mortgage loan. This lien would be recaptured by the government when the asset is sold (assuming adequate equity growth and that the property is held for at least five years) or if the property is refinanced. There would be no repayment obligation by homeowners in excess of that which could be captured by appreciation. Losses would be borne by the federal government, but would be minimal relative to the costs of failing to end the foreclosure crisis.

Nonprofits Act as Trusted Advisers

Studies have shown that consumers are wary of contacting their loan servicers to request loan modifications or other advice. Given the substantial level of predatory lending in the market, and growing concerns over fraud, their fears are neither surprising nor irrational. Under the HELP Now program, nonprofit intermediaries would serve as conduits to do outreach and provide counseling to homeowners, linking them to the HELP Now program. The key here is that the lending industry would be reengaged in the process, but would use criteria that include prime rates and consideration of the borrower’s ability to pay, thereby helping homeowners remain in their homes at a monthly rate that makes sense and allows for long-term homeownership.

Assist Borrowers Who Have Lost Their Homes

The final piece of the proposal would empower HUD with expanded authority and resources to develop a plan, working with nonprofit community-development organizations, to address foreclosed and vacant and abandoned properties. Consumers who have lost their homes because of foreclosure would have a right of first refusal to repurchase their homes. Properties that are not suitable for repurchase or whose former owners are no longer interested in or eligible to buy them back would be transferred to the HELP Now initiative’s REO (real-estate owned) program. It would allow nonprofit housing organizations to acquire properties at substantial discounts, rehabilitate them to bring them up to code, and provide them as either affordable rental housing or as lease-to-own properties to families. The focus of HUD’s HELP Now REO property efforts would be to ensure that properties are returned to productive and affordable use as quickly as possible.

A Win-Win for Families, the Housing Finance Industry, and the Markets

The NCRC proposal addresses the single most challenging hurdle that current modification efforts have faced: the inability to restructure or refinance loans held in securitized pools by investment banks. By purchasing those loans, servicers could be immediately directed to offer meaningful modifications that create long-term homeownership affordability. The market helps defray costs up front by selling loans at a discount to the government. Lenders can offer refinancing options that meet the borrower’s ability to repay loans based on the current and realistic value of properties. And families who have lost their homes to foreclosure can recover that loss. By including soft seconds in subsidized loan agreements, the government is paid back a substantial share of its upfront investment.

This broad-based plan not only addresses the most significant challenges facing the housing industry related to the foreclosure crisis, but also ensures that the private markets play the lead role in stabilizing families in their homes. HELP Now would provide a needed stimulus to the housing market that should contribute significantly to the ailing economy. Finally, HELP Now is not a bailout, but instead is a true public-private partnership that shares the burden for ending the foreclosure crisis.

The Long-Term Answer

Atlas and Dreier are also right that anti-predatory lending legislation is needed. Today, astonishingly, the U.S. Congress has yet to present President Bush with comprehensive legislation outlawing the kinds of predatory lending practices that created the foreclosure crisis in the first place. Predators are still taking advantage of now-desperate homeowners and getting them to take out loans that further strip home equity and add additional debt.

Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking, Housing & Urban Affairs Committee, has proposed a strong, anti-predatory lending bill that will, if enacted, eliminate nearly all of these predatory practices and hold all participants in the lending process—from broker to lender to Wall Street securitizer—accountable for violations of this law. Given what we now know about predatory lending practices, it would be a colossal failure on the part of this Congress and the White House to not pass Dodd’s bill.

Congress should also change the bankruptcy laws to protect homeowners and conduct comprehensive oversight hearings and investigations into the regulatory failure endemic to this crisis. The White House should instruct the U.S. Attorney General to investigate the discriminatory lending practices that have proliferated and caused financial damage to many communities.

The current reality should dispel once and for all the notion that individual borrowers were somehow to blame for the subprime crisis. It’s now indisputable that widespread unfair and deceptive lending practices significantly contributed to the current economic downturn. And consumers have been the big losers in a system in which their loans are no longer held in a lender’s portfolio but instead are securitized by Wall Street and those who earn by using other people’s money. The financial damage from this unprecedented, infectious greed and malfeasance will affect us all, possibly for decades.

In order for Wall Street to be as accountable as portfolio lenders, it must be subject to a direct line of accountability and liability. Otherwise, usurious practices will inevitably arise once the housing market heats up again. To stanch the flow of foreclosures, we need immediate and effective interventions that sustain homeownership. And, in the long term, we will continue to work for strong, national anti-predatory lending standards that will prevent future abuses in the housing finance market.

John Taylor is president and CEO of the National Community Reinvestment Coalition.

Published by the National Housing Institute