1. Don't Let the Lenders Lie. When lenders and servicers say they can't modify the principal on a loan because it's in a security and their securitization agreements don't let them, they're lying. They may not be doing it on purpose, but they are. None other than Ocwen, one of the largest subprime servicers, read through all the fine print, and found that only about 5 percent of their pooling and servicing agreements have any restrictions on how a lender can work out a loan, as long as it's in the best interest of the investor. In fact, says Ocwen CEO Ron Faris, “where our net present value analysis shows that a principal reduction modification that is sustainable by the homeowner will likely return more cash flow to the investor than a foreclosure, we are not only legally permitted to do that type of mod, we are arguably required to do it.”
The same argument could be made about the GSEs' obligation to the American taxpayer, which could be addressed with the Preserving American Homeownership Act, introduced by Sen. Robert Menendez (D-NJ).
2. Take Modifications Out of Banks' Hands. As lenders are tying themselves in knots worrying about “moral hazard” and the AG settlement and whether a given market has bottomed out, people are losing their homes and communities are suffering. So some players—nonprofits and states—are using Hardest Hit Funds or patient private capital to buy either underwater loans or houses through short sale and sell them back to the original owners with a sustainable loan. Everyone comes out better than they would in a foreclosure, including the lender.
3. Don't Punish Low-Income Homebuyers for Wall Street's Crimes. Predatory products pushed during a bubble on unprepared homeowners and homebuyers caused the housing crisis. But somehow that has translated into “low-income people can't be good homeowners.” This misrepresentation, and the ultra conservatism about lending that it has spawned, flies in the face of the facts:
Large studies (40,000 from Self-Help's secondary market program, 15,000 in Massachusetts' Soft-Second program) have shown that if you take households who would be given subprime or no loans by their credit scores and other measures, carefully underwrite them, and give them a prime product — 30-year fixed-rate loan, no added costs — along with some good pre- and post-purchase counseling and support, that their success rate equals or in some cases well exceeds those of the general population with prime mortgages. And this is a much lower income population.
We know how to successfully and safely lend to low-income families. It's not a mystery. It doesn't require 20 percent down or a 700 credit score. And right now we need borrowers with mortgage credit to invest in our neighborhoods.
4. Take the Bombed Out Buildings Off the Market. Sometimes the market just fails. Getting the worst of the worst into a land bank and off the market — to be properly demolished, maintained, or rehabbed as appropriate — keeps property values from plummeting and removes the blighting influence of those buildings on their neighbors. Land banks are a way for local governments to cut the speculation cycle short and make collective decisions about their land. Of course lenders who want to “donate” properties in need of demolition need to also cover the cost of that demolition, or the land bank just becomes the banks' trash can.
5. Make Friends With Hedge Funds. Yes, you read that right. Not with the bottom feeder speculators whose business model is specifically making a bundle off of flipping crumbling properties in troubled neighborhoods while evading local laws and codes. But there are other private equity investors who are going to be buying large pools of mortgages or foreclosed properties — and the lenders are going to stuff into those pools some properties the investors didn't want: in distressed neighborhoods, in states where foreclosing takes years. These investors need an exit strategy for those properties they consider worthless. Community organizations that have the ground game — local market knowledge, housing counselors, mission-driven development experience — to be able to put some value on those properties could actually have a value proposition for large investors, if they can figure out how to structure a partnership. And that could prevent foreclosures and get empty houses into the hands of those whose top priority is the neighborhood.
6. Organize, Organize, Organize. There's nothing contradictory about the need for a well-orchestrated, grassroots accountability campaign and the need for stabilization advocates to sit at the table with the capital markets as peers and potential partners. In fact, they are both essential. The relationships that come from negotiating a resolution to conflict are stronger than those based on supplication and fear of rocking the boat.
These steps are just a start, but the lessons from the financial crisis are clear as day. Will we learn from them, and let government do what we created it to do — in this case, protect consumers, make banks play fair, and preserve access to opportunity for all — or will we tumble back into the mess that got us here in the first place?