Homeownership

While far from robust, most economists are treating the March jobs report of 216,000 net new jobs as a sign that the recovery is finally picking up some steam. But we have miles to go before we sleep. At this rate of growth, it will take us another seven years to get back to the 5 percent unemployment rate of early 2008. This means there will be a great deal of pressure on local housing markets, where mortgage default and home foreclosures will continue to devastate formerly stable families and communities alike. I’m fairly surprised that the unfolding hardship is not generating more attention here in DC among policymakers and I’m also fairly certain that there is shared interest in findings ways to limit the extent of household displacement and property abandonment.

Next week, we will be holding a public event that seeks to focus attention on the current foreclosure crisis and what policy ideas can be deployed to help communities and families mitigate the impact of the current foreclosure crisis. You can join us in person or tune in to the webcast live or on demand.

We will be looking at what’s working and not working at the local level, and also what specific set of policies and practices can be scaled and deployed to effectively manage the crisis. Sen. Merkley from Oregon is scheduled to help kick off the session, as he and his staff have been working on elevating this issue and shining some light on potentially promising proposals. Obviously, with the current political climate  it will be difficult to generate the degree of bipartisan engagement necessary to forcefully address this problem. That’s a shame and given the scale of the problem, it’s a real indictment of our politics. But I also think another challenge is to raise the profile of specific policy ideas that can make a difference.

Across the country, a range of strategies and policies are being tried out and are candidates for replication. For example, in a recent issue of Shelterforce put out by the National Housing Institute, Miriam Axel Lute describes the promising strategy of lease-purchase agreements. Also known as rent-to-own, lease purchase allows for “not-quite-mortgage-ready buyers” to occupy the house they intend to buy as a tenant until they are ready to take on a new mortgage. What I like about this is that is keeps homes occupied and is a potential avenue to keep families under the threat of foreclosure in their homes but under new terms. Both of these scenarios are preferable to the alternatives of a long-term vacant home and a displaced family.

It is a good idea and there is a growing body of practice out there showing how it can work.

I wanted to live on our block from the first moment I saw it. I wish I could tell you that some quirky, perfect detail captured my heart, but there was no such “movie moment.” Somehow, the genteel dilapidation of its creaky row houses and elderly trees was just slightly more charming than on any other block of Washington, D.C.

The story of the Great Recession cannot be told without understanding how abuses in a once obscure corner of the home mortgage industry—the subprime market—led to the near collapse of the world’s financial system. That's why we're excited to be hosting Kathleen Engel at an event tomorrow. Along with Patricia McCoy, she is the author of The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps. The book offers a detailed account of how the world of mortgage finance shook the American and global economies to their core.

Hot off the presses, a new study has been released evaluating the ten-year impacts of an intervention featuring Individual Development Accounts (IDAs) in Tulsa, Oklahoma. The idea behind IDAs is to provide an incentive for savings that is used to purchase a specific set of assets, such as homes, by directly matching deposits into designated accounts.

Two of Wall Street's savviest value investors, Bruce Berkowitz and David Einhorn, pride themselves on their rigorous analysis. Now they're locked in a scorched-earth dispute over the value of some Florida real estate. How could they look at the same facts and reach such wildly different conclusions, and what does that say about the “value” of value investing?

On March 16, 2011, Kathleen Engel, Associate Dean for Intellectual Life and Professor of Law at Suffolk University Law School, presented  from her book The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps, co-authored with Patricia McCoy, the Assistant Director for Mortgage and Home Equity Markets at the Consumer Financial Protection Bureau (CFPB). The Subprime Virus tells the story of how abuses in the subprime home mortgage market led to the near collapse of the world’s financial system. 

The Great Recession has functioned like a large wrecking ball. One object of destruction has been the housing market. Price declines, loan defaults, and an unprecedented level of foreclosures have created a mess and left the housing finance system in shambles. This past Friday, the Obama Administration released its report on “Reforming America’s Housing Finance Market,” which was designed to start the rebuilding process.

Much of the initial anticipation has been focused on the fate of the two firms that stood in the middle of the housing finance system: Fannie Mae and Freddie Mac. With roots that extend back to the 1930s, these firms pursued a range of practices that increased the availability and accessible of mortgage financing. But their main business became underwriting the securitization of mortgages, which were packaged, sliced, and sold to investors around the world. Although they were created by the government, they were publicly traded companies that raised money in the capital markets and in turn sought to deliver profits for their investors who were comforted by the belief that the firms would have access to federal support if times got tough. The popping of the housing bubble brought on the tough times as the value of the mortgage-backed securities plummeted.

Fannie Mae and Freddie Mac have become wards of the state. Their losses are being covered by all of us collectively. Although much of the federal money distributed to stabilize the banks under TARP has been paid back (without so much of a thank you note), that has not been the case with Fannie and Freddie. They have soaked up about $130 billion, and counting, to meet their obligations.

The Obama administration made it perfectly clear in their report that Fannie and Freddie will be wound down. It is certainly a good move to resist trying to put them back together again. Perhaps we should not be so surprised that the profit-maximizing structure undermined the public mission.

But what’s next for the housing finance system?

Despite the return of the stock market, the housing market remains a mess and is filled with uncertainty. Scores of families across the country are on the cusp of losing their homes and being displaced from their communities. In many cases, foreclosure is a lose-lose-lose proposition, negatively impacting families, lenders, communities (and taxpayers) alike.

But many foreclosures are avoidable. Given the current scale of the problem, where one in four mortgages are underwater and over a million of foreclosures are predicted for this year, we should be stepping up the pace with implementing policies that can put a stop to the wave of mass foreclosures sweeping the country.

One idea that has shown promise is a reform to the foreclosure process which gets all the interested parties in a room to talk and explore renegotiation. Half the states already have a process in place to facilitate mediation but the process can be made more effective if it is inserted into the process automatically as a default. This approach is working where it has been tried and the next challenge is to get the federal government behind the event.

Alon Cohen and some of his colleagues at the Center for American Progress have been talking up this idea. They note that even though none of the parties are under any obligation to settle in mediation, in practice they settle more than half the time. In previous papers they have explored how foreclosure mediation works and its impacts at the state and local level when it is automatically part of the process.

Alon has just released a new paper describing what the federal government can do to support the spread of this innovative and successful practice. It is an important paper and is worth a read by anyone looking for solutions to the current mortgage mess.

His central proposal is that all mortgages backed by the U.S. government should be forced to go through mediation prior to foreclosure. This means Fannie Mae, Freddie Mac, and FHA will require their loan servicers to implement automatic mediation prior to foreclosure. In this way automatic foreclosure mediation will be added to the list of “loss mitigation” activities already required of them. Further, Congress should make clear that judges in federal bankruptcy cases have the power to require parties to mediate mortgage issues, just as they currently order alternative dispute resolution (such as negotiation or mediation) for other issues. Together, these two provisions would impact the large majority of mortgages under threat of foreclosure and create new means to stabilize the housing market.

Ray Boshara prepared this presentation for the Southern Regional Asset-Building Coalition Conference, "Closing the Wealth Gap: Promoting Change by Working Together," held October 21 and 22nd, 2010 in New Orleans. 

Click here to view the entire presentation.