David Sassaroli contributed reporting for this article
Home Opportunity is at a crossroads, and with it the American economy. Misconduct by banks, inadequate rules, and lax enforcement have cost 4 million families their homes since the financial crisis began, devastated communities around the country, and triggered a deep recession that we are still digging our way out of. A clear-eyed assessment of where we stand today shows progress, but also peril, and more work to be done.
The progress is real. The number of homes in the foreclosure process fell by 28 percent this January, as compared with the year before, and lenders took possession of fewer homes. Last year’s foreclosure activity was 36 percent lower than 2010, when filings peaked at 2.9 million. New mortgage delinquencies were declining at the end of 2012, as home prices and demand began to rise.
Those positive trends didn’t happen on their own.
They resulted in large part from strategic problem solving and effective policy decisions by the Obama administration, innovative states and localities, and, in some instances, enlightened lenders and loan servicers. Most correspond to recommendations from the Compact for Home Opportunity, a collection of solutions from experts around the country.
A recent status report on the Compact showed that many of its recommendations have been adopted. Most notably, the administration joined with 49 state attorneys general to negotiate a massive mortgage fraud settlement with five big banks that introduced important new servicing guidelines as well as limited principal corrections and other reforms. Most recently the Administration issued new fair housing regulations and expanded housing counseling, which has been tied to successful homeownership and taxpayer savings. The regulations address predatory lending and other practices that target communities of color.
Several states have passed their own reforms that provide even greater consumer protection and remediation than does the national mortgage settlement. Most notable among them is California’s Homeowner Bill of Rights. Foreclosures are down 75 percent from a year ago in California, which had been one of the hardest hit states. By contrast, Florida ranked highest among the states for the fifth month in a row this January. One in every 300 Florida homes had a foreclosure filing that month – more than twice the national average.
Some lenders and servicers should be commended for the steps they’ve taken to help homeowners. For example, Ocwen Financial Corp., the largest servicer of subprime mortgages, has been widely acknowledged for reducing principal for close to 20,000 borrowers by an average of $75,500 per loan, with almost 60,000 modifications completed since launching its nationwide shared-appreciation program in July 2011.
But the progress is tempered by continuing peril. The 4 million American homes that banks have foreclosed since the start of the financial crisis continue to reverberate for families, communities, and the economy as a whole. They represent millions of children displaced, senior citizens robbed of their security, and communities pockmarked with abandoned and blighted properties. They affect all of us in one way or another.
Today, nearly three million loans are in or near foreclosure, and almost 11 million homeowners are seriously underwater. Without additional solutions and smart implementation, our remaining problems will hamper a full economic recovery and could drag us back into recession.
Those solutions exist, and it’s time to move them forward. Our status report on the Compact for Home Opportunity showed that, despite significant progress on multiple fronts, policymakers have failed to take several crucial steps to stem foreclosures, restore devastated communities, and restore homeownership as a path to the American dream.
One urgent priority is correcting to fair market value the principal on mortgages backed by Fannie Mae and Freddie Mac. Despite pressure from housing advocates, the Obama administration and other federal agencies such as the Treasury Department and the Federal Housing Finance Agency (FHFA, the agency that oversees Fannie Mae and Freddie Mac) have so far refused to expand principal corrections to loans owned by the government-sponsored enterprises. Despite his own agency’s finding that principal write-downs would result in significant net savings for Fannie and Freddie, the FHFA Acting Director Ed DeMarco has refused to take this desperately needed step.
Other priorities in the Compact require bolder action. The Obama administration’s Making Home Affordable Program, an initiative developed by the Treasury Department, includes the Home Affordable Modification Program (HAMP), intended to help eligible homeowners modify their mortgages, make payments more affordable, and avoid default. The executive branch, however, has made little progress to broaden the coverage of HAMP and needs to pursue more active enforcement against violators of HAMP rules. Furthermore, only modest progress has been made to improve Federal Housing Administration (FHA) practices and oversight, a key provision for ensuring fair and sustainable mortgages in the future. The Obama administration reduced FHA costs and fees, but must do more to ensure the FHA provides robust oversight of lending practices.
Congress, however, has truly been the weak link when it has come to action on the key provisions of the Compact. No legislation has been passed that will continue government engagement in the secondary mortgage market, integral to supporting both stability (by ensuring constant and stable funding) and coverage (by ensuring the availability of financing for sustainable loans to all qualified home buyers and owners) in mortgage lending. Congress has also failed to enact legislation that would allow primary residence mortgages to be restructured in bankruptcy, which would allow borrowers to potentially keep their homes and continue payments on the restructured debt. Despite the current climate of partisanship, American homeowners deserve greater progress on both the ability to acquire homes sustainably and stay in them during times of distress.
Indeed, we must continue to push all actors to make progress on the proposals included in the Compact, whether those actors are Congress, the executive branch, banks and mortgage servicers, or states and localities. The word “compact” implies unity among its members, and so we must work together to continue the progress we’ve made and to avoid the peril of inactivity.
Photo courtesy of Fibonacci Blue (CC BY 2.0)