One of the sad legacies of the housing and mortgage securitization bubble and the subsequent collapse of the economy over the past two years is the virtual devastation of working-class neighborhoods throughout the United States. Thousands of homes sit vacant and deteriorating after foreclosure or are listed for sale at a price half or less than their value just 18 months ago.
Foreclosures aren’t hitting just the working class, but The New York Times reports that workers in the manufacturing and distribution sectors were keeping up mortgage payments until they found themselves unemployed and unable to pay for their homes, complicating efforts to stem foreclosures.
Even as the Treasury Department appears poised today to announce efforts to force more banks to modify loans, increasing evidence suggests that the federal government’s efforts are floundering.
Rather than focusing their efforts on the complicated Homeowner Affordable Modification Program (HAMP), or on bailing out banks in the hope that they will loan more money to homeowners and small businesses, federal policymakers can accomplish more for those facing foreclosure, not to mention their neighbors and American taxpayers, by making relatively modest changes to the business practices of the Federal Housing Administration and HUD.
The story of an Ohio worker and homeowner illustrates how the federal government is missing easy opportunities to play a meaningful role in reducing the impact of the foreclosure crisis and the recession on real people.
In 2007, Bob was employed by DHL as a driver earning over $20 per hour. He bought a modest house in a middle-class suburb of Cleveland for a fair market price of $90,000 to live in with his son. When DHL shut down its U.S. operations in 2008, Bob, along with thousands of others nationally, was laid off.
Meanwhile, back on Bob’s street, for sale signs proliferated and one of six homes in his community is in foreclosure. As a result, the market value of Bob’s home has dropped to less than half of what he paid for it.
Bob and his son were able to survive on his unemployment benefits but couldn’t pay the monthly mortgage. Bob recently took a job with FedEx paying less than half of what he earned at DHL and less than his unemployment benefits, because he simply couldn’t stand “not working any more.”
His mortgage, which was insured by the FHA, is being foreclosed. With the costs of foreclosure and 18 months of late fees included, the lender claims to be owed $120,000 on a house optimistically worth $50,000.
Bob requested that his foreclosure case be sent to mediation, and he provided the lender with extensive documentation of his income and expenses and the current value of his home during the course of those negotiations. The loan servicer has refused to agree to a modification of the terms that makes any sense to Bob. They are completely unwilling to consider any modification that reduces the principal balance at all, let alone bring the figure anywhere close to the current value of the home.
Bob does not qualify for the H.A.M.P program, the centerpiece of the Obama Administration’s effort to assist homeowners in default and foreclosure, because his loan (like the loans of most people in foreclosure) is more than one year behind. That program actually pays cash to lenders and mortgage services who agree to modify loans.
During the course of the negotiations it became increasingly clear that the lender or loan servicers have no incentive to enter into any kind of meaningful modification.
Because after foreclosure, FHA stands ready to pay the lender 100 percent of its loss on the loan, including the cost of foreclosure. If the lender were to agree to modify the loan, it would be paid far less.
Here is the outrage. If the lender proceeds to foreclosure, Bob and his son will be thrown out of their home and the lender will be made whole at the cost to FHA — and ultimately the taxpayers — of $80,000 or more.
This scenario is repeating itself in mortgage foreclosure cases throughout the country, putting the solvency of the FHA at risk while throwing thousands of working people out of their homes. The New York Times recently reported that FHA itself might be in need of an infusion of cash.
If FHA were included in the negotiation and would agree to pay lenders some amount –say half of what they are likely to lose, $40,000 — to allow the principal to be reduced, Bob could refinance at competitive interest rates and stay in his home, the federal Ggvernment and ultimately the taxpayers would save $40,000, and the lender would have an interest-paying borrower (who can afford the lower payment) and earn profits from the interest.
Everybody wins under this scenario.
Another problem that could be fixed by a more realistic approach by HUD and the FHA was detailed in a recent Cleveland Plain Dealer Story about problems created by HUD’s failure to demolish or fix homes they own (mostly as a result of FHA insured foreclosures) in greater Cleveland. Dilapidated houses drive down housing values for entire neighborhoods. Making it tougher for guys like Bob to sell or refinance their homes and making community problems worse. Local communities are struggling to maintain housing stock in aging neighborhoods, and HUD’s failure as a homeowner has devastating effects on entire communities.
The Federal Government has a chance to raise the bar for responsible homeownership, yet instead they appear to be lowering it. HUD should be a model community citizen, collaborating with local housing officials on neighborhood wide efforts to improve home values. The agency should hire local consultants or even contract with local governments and empower them to make quick and honest assessments of the likelihood of selling any particular piece of real estate with an eye toward the best community use for the property. For houses that will not realistically sell in a reasonable timeframe, HUD should require that the houses be demolished within 30 days.
Increasing evidence suggests that the new programs being created by Congress and the Obama administration are not having a significant impact on the foreclosure problem. Only 1711 homeowners nationally had completed a modification by September 1, 2009 under the HAMP Program.
Bob’s story suggests that a better approach may be to find ways to make the existing machinery of the federal government’s mortgage programs work in the interests of homeowners and taxpayers.
Marc Dann is a Cleveland lawyer who represents homeowners in foreclosure.