On Feb. 9, 2012, 49 attorneys general announced the $25 billion National Mortgage Settlement. That same day, Sen. Robert Menendez introduced the Preserving American Homeownership Act, a bill that would help eligible underwater homeowners by creating a program where banks reduce mortgage principal in exchange for a portion of the increased value of the home over time via a shared appreciation mortgage. Shelterforce talked to Menendez (D-N.J.), who serves as chairman of the Senate Banking Committee’s Subcommittee on Housing, Transportation, and Community Development, about this initiative, the ongoing federal response to the housing crisis, the Sustainable Communities Initiative, the Occupy movement, and more.
Shelterforce: You think the GSEs should conduct principal reduction for underwater and at-risk homeowners to keep more people in their homes and reduce the loss to the taxpayer. But FHFA has been really resistant to that idea and it’s gotten political. How do you see a path forward in the current environment?
Sen. Robert Menendez: We need to keep the heat on. I think one of the things that we have to deal with is the regulatory processes, how banks get treated if they do the principal reductions that we want them to do, [and] how the reduction takes place.
This year I introduced legislation where the loan is written down to 95 percent loan to value ratio and where, in return, the lender, for reducing that amount of the original loan, will get a percentage of any increase in appreciation. So it incentivizes them to write down the loan now when people desperately need it and take the risk.
Should the fact that a private servicer like Ocwen Financial is carrying out a shared appreciation mortgage program help make the GSEs more comfortable with it?
I think so. Ocwen is actually the genesis of some of this idea. See Shelterforce’s interview with Ocwen CEO Ron Faris. They’re doing it in the private sector, of course, within a [limited] universe. I want to dramatically expand that universe.
It seems to me that the GSEs would look at it and be able to say, “Well, we still have an opportunity to [retain] a significant amount of principal at the end of the day by having a percentage of future appreciation recaptured,” and therefore strengthen their portfolio.
My argument to the GSEs and the conservator, who I think has had a very narrow view of conservatorship, is when a house forecloses, how much don’t you lose? And if you’re going to take that write-down, then why not take a write-down that, at the end of the day, keeps families in their homes?
Exactly. You mentioned potential regulatory help in terms of the principal write-down. Do you have specific ideas in mind?
Part of the challenge for the banks is that if they write down significantly large parts of their portfolio in the mortgage market, their rating with the regulators is affected. And so it’s almost like “Let me keep the property on the books because for so long as I keep the property on the books, I can have it at the value that I lent at or it was appraised at.”
First of all, that’s unrealistic because, obviously, values have changed. And second, it’s unrealistic for the regulators to insist that they recapitalize to the extent that they go ahead and make principal reductions, when in fact we all know that those would be write-downs anyhow. We need to allow principal reductions to take place but not penalize the banks for doing so.
Do you think the special mortgage investigation unit headed up by New York State AG Eric Schneiderman could quell some of the concerns that the AG settlement didn’t go far enough? In what way would you like to see it have an effect?
The president’s effort is to ensure that those who violated the existing law get prosecuted and I think this would send a clear message to the marketplace.
Shouldn’t this have happened sooner?
Yes. I mean, I certainly would have liked it done earlier. I think the administration was totally consumed with dealing with the consequences of what happened more so than the causes in the first instance, but I’m glad that the president ultimately got to it.
The constant threat to cut HUD housing counseling funds has caused a lot of concern throughout the housing field. Why are these funds viewed as expendable? Aren’t these the type of programs that should receive widespread, bipartisan support?
Well, you would think so. In FY11, the funding for the Housing Counseling Assistance Program was completely eliminated, but I led a successful fight to reinstate the funds for FY12. Statistics show that those who have a housing counselor are more likely to successfully achieve a loan modification than those who do not, and it seems to me that we want loan modifications so that we can keep families in their homes, keep property values up, and create stable neighborhoods.
So, no, I don’t understand the opposition other than there is a myopic view in Congress led by the Tea Party that says any government program, even when it can factually be justified as being productive and successful, is still not desirable. We will continue to fight that view.
How can we make sure that these funds are in place for more than a year at a time?
It is going to be part of our fight here, and we need families — the constituents and voters and the housing advocates — to raise their voices on this issue. Adlai Stevenson said it best when he said, “When I get the heat at home, I see the light in Washington.” And, except for a handful of us in Congress, this is an issue that hasn’t really had advocacy by a universe of Americans who say, “Hey, we need this desperately.”
We’re going to have to get that type of advocacy effort so that more members see the light as certainly I have. I hope the administration will continue to advance a more robust program in terms of counseling and I hope that some of the money that comes from the attorney general settlement will address the issue of housing counseling.
The Sustainable Communities Initiative has been one of the highlights of the administration’s work at bringing different agencies together. It builds on what we in the field all know: that communities work much better when housing and transportation and environment are considered together.
But now HUD’s leg of that three-legged stool and the Partnership for Stable Communities are being defunded. Can you talk a little bit about how that partnership will function or not function with HUD removed from participation?
Well, obviously it’s a shame. I introduced the Livable Communities Act of 2011, which is the bill that would authorize the HUD Office of Sustainable Housing and Communities and its regional planning and community challenge grant programs. These grants basically support community efforts to establish and help implement locally defined goals for future growth and redevelopment through some comprehensive planning and capital improvement programs.
Without HUD’s involvement, I think it clearly hobbles the ability to achieve the goal of sustainable, livable communities, because HUD is an important segment of that. And this is clearly a target of members of Congress who are of the view that the private marketplace will figure it all out, and helping communities plan for sustainability is something that is not a federal role.
Finally, the stronger the advocacy there is for this, the more it sustains its ability to exist and to grow. The weaker the advocacy for this in contrast to other things, then the more likely it faces elimination. And so that’s part of our challenge here. It’s an everyday battle.
There’s a narrative that says that the cause of the financial crisis was Fannie and Freddie forcing banks to give mortgages to poor people who couldn’t afford homes.
Oh, that’s ridiculous.
It is, but it gets a lot of attention.
I know, and while Fannie and Freddie need to be reformed, we need a Fannie and Freddie in the marketplace, otherwise, we’re not going to get homeownership as a reality.
Second, what happened with Fannie and Freddie is that they followed the market, but they didn’t drive it, in my view.
Right. So the big lie has such power when it’s repeated over and over. You mentioned the Tea Party earlier, and their mantra was “Cut spending, cut taxes.” The Occupy movement seems to have introduced a refrain of “fairness and more income equality.” What do you think that’s going to do to affect the narrative, moving forward? Is this a good thing that they’ve done?
I think they clearly have struck a responsive chord in American society and that if we continue on the path of rising inequality we will feel challenges in our country that we have only read about in other countries in the world.
It seems to me that fairness, whether we are talking about fairness in the housing market, fairness in our tax policy, or fairness in the distribution of federal resources, is something that is likely to be with us now as part of the fabric of all the public policy discussions moving forward.