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).