No More Excuses on Relief to American Homeowners

Read also: Home Opportunity Initiative

One by one, the excuses have fallen. Yet Edward DeMarco, acting head of FHFA, the agency that runs Fannie Mae and Freddie Mac, still fails to offer the most effective relief available to American homeowners struggling with mortgages held by those entities. Economists, housing experts, and members of DeMarco’s own staff have concluded that reducing to affordable levels the principal owed on at-risk mortgages is effective in reducing foreclosures and their destructive fallout. But, inexplicably, he’s been unmoved by the mounting evidence.

Two weeks ago, after hinting at a possible change of heart, DeMarco punted on the question, saying it needed more study and stating that such a policy question “should be determined by Congress.” But the evidence is too clear, and the stakes are too high, for further delay. It’s time for Mr. DeMarco to either act in the nation’s interest or get out of the way.

While many parts of our economy have gradually improved over the last several years, foreclosures are on the rise in regions around the country. The foreclosure data company RealtyTrac has predicted that one million American homes may enter foreclosure in 2012. An estimated 12 million Americans currently owe more on their mortgages than their homes are worth, meaning that millions more are at risk.

Fannie, Freddie, and DeMarco’s agency have an oversized role to play in addressing the crisis, since the entities are assumed to own or back roughly 3.3 million underwater mortgages and help set trends in the larger market. By including principal reduction among the tools they use, they could help millions of Americans save their homes while making sustainable payments toward the actual value of their property.

The American people essentially own Fannie and Freddie after a $150 billion bailout. Even before that, the entities were tasked with providing stability and affordability to the nation's mortgage finance market. FHFA’s mission similarly includes supporting housing finance, affordable housing, and a stable and liquid mortgage market, as well as promoting Fannie and Freddie’s safety and soundness.

The calls for principal reduction are growing louder, with evidence increasingly demonstrating that those interests all point toward principal reduction. It results in fewer foreclosures, as compared with alternatives like loan forbearance (delaying loan obligations) that FHFA has authorized. In addition to the obvious benefits to struggling homeowners, reducing foreclosures improves neighborhood home values, prevents abandoned and blighted properties, and saves cash-strapped municipalities the costs of upkeep and enforcement.

Many private lenders have been reducing principal obligations on their own, recognizing it’s often the best way for them to recoup their investment. Moreover, the strategy was a significant part of the Attorneys General settlement over “robo-signing” and related bank misconduct.

Reports have emerged that even FHFA’s own internal analyses show principal reduction is in the interest of both underwater homeowners and Fannie and Freddie. Documents recently obtained by the Congressional Progressive Caucus reportedly show that DeMarco’s agency studied the question in 2009, decided it was worth trying, worked with a major lender to develop a detailed pilot, and then abruptly canceled it in July of 2010 for what the Caucus says were ideological reasons.

To be sure, principal reduction is not a silver bullet. A range of aggressive solutions are necessary to address America’s foreclosure crisis, restore ravaged neighborhoods, and put our national economy back on track. Indeed, a coalition of housing and public interest groups that includes The Opportunity Agenda, National Council of La Raza, and the National Fair Housing Alliance has released a Compact for Home Opportunity highlighting over a dozen actions that government, private industry, and individuals can take to turn things around.

Principal reduction may be only one of those actions. But it’s an important one. With a million American homes at risk of foreclosure, the time for action is now.

Obama’s Wrong Note on Foreclosures

As Election Day nears, President Obama is regaining his populist mojo. His State of the Union speech was mostly pitch perfect, evoking core American themes of opportunity and optimism, and calling for “an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.”

But the President has repeatedly hit a wrong note in talking about the foreclosure crisis. Not only is his story inaccurate, but he is promoting a harmful narrative that will make it harder to fix the problem.

The President said in his State of the Union address that “we’ve all paid the price for lenders who sold mortgages to people who couldn’t afford them and buyers who knew they couldn’t afford them.” He repeated that theme a week later at a speech in Falls Church, VA, contending that people who did the “right and the responsible thing” were hurt by “lenders who sold loans to people who they knew couldn’t afford the mortgages; and buyers who bought homes they knew they couldn’t afford; and banks that packaged those mortgages up and traded them to reap phantom profits, knowing that they were building a house of cards.”

According to the President’s narrative, then, large numbers of Americans who are struggling beneath unsustainable mortgages willfully chose that fate and deserve roughly equal blame as do the lending and financial giants who cooked up the subprime scheme, targeted vulnerable communities, engaged in deceptive and discriminatory practices, chopped up and distributed faulty loans, and forced fraudulent foreclosures. A different class of “innocent, hard-working” people are the only ones paying the price in this narrative.

Let’s be clear. The foreclosure crisis was caused by reckless misconduct by the lending and financial industries, inadequate rules and enforcement, and staggering long-term unemployment. America’s long history of overwhelmingly successful homeownership went to pot because regulators looked the other way and unscrupulous corporations took advantage, not because working Americans suddenly became wildly irresponsible. Indeed, conscientious lenders like Self-Help Credit Union in North Carolina successfully made loans to the same group of working Americans over the same period with negligible default rates.

Am I saying that no American homeowner ever applied for a mortgage without a realistic plan to repay it? Of course not. A key purpose of proper underwriting standards and regulations is to help lenders and buyers determine what’s mutually sustainable. But to divide American homeowners into “responsible” ones who’ve managed to stay current on their payments and supposedly “irresponsible” ones who’ve fallen behind is inaccurate and harmful.

After confessing that he and the First Lady—two Harvard-trained lawyers—had trouble deciphering their own first mortgage, the President has nonetheless failed to convey how many Americans were victimized by deceptive and predatory practices; how many families sacrificed all to pay the mortgage after one or both parents lost a job; and how many people facing foreclosure today would be successful homeowners if fair rules and vigilant regulators had been in place. He also leaves out how much each of us benefits when we help our neighbors avoid foreclosure, even if we’ve personally managed to stay current on our own mortgages.

The President’s flawed story erodes the public will to aid struggling homeowners and bolsters those who say that the foreclosure crisis should be allowed to “run its course”—why rally to help people you’ve told us are irresponsible? Yet, without a more ambitious policy agenda than we have now, we’ll see millions more Americans lose their economic security, families uprooted from schools and communities, senior citizens thrown into uncertainty or destitution, and the economy in continued chaos.

The President’s current story is also deepening the feelings of shame that keep too many Americans from seeking the advice that could help them save their homes or, at least, make a successful transition. Housing counselors say the stigma attached to foreclosure keeps many people in the shadows instead of accessing the services that exist. It doesn’t help when the Commander in Chief labels them irresponsible.

It’s time for a new, accurate story about homeownership, opportunity, and the American Dream. It’s a story that places blame where it belongs while recognizing that we each have economic and moral responsibilities. It’s a story about the solutions to the crisis that exist, including many that the Administration can take without any action from Congress. And it’s a story about why, in this crisis as in so many others, we are all in it together. As communicator-in-chief, the President should take the lead in telling that story.

Read also:

Promises, Promises: President Obama’s NDAA Signing Statement

This time last year, President Obama responded to the 2011 National Defense Authorization Act with a signing statement. Objecting to the law's restrictions on the transfer of Guantanamo detainees to the U.S. for trial or to their home countries, the president promised: "My Administration will work with the Congress to seek repeal of these restrictions, will seek to mitigate their effects, and will oppose any attempt to extend or expand them in the future." (My emphasis).

This past New Year's eve, President Obama signed the 2012 National Defense Authorization Act, or NDAA. In doing so, he extended the Guantanamo transfer restrictions, while also codifying the indefinite detention without trial of suspected terrorists. In the statement he issued with that signature, he said:

"I have signed this bill despite having serious reservations with certain provisions that regulate the detention, interrogation, and prosecution of suspected terrorists."

The pledge to seek repeal and oppose expansion of transfer restrictions had melted into a watery "reservation."

The president's Saturday statement also makes a new promise.

"I want to clarify that my Administration will not authorize the indefinite military detention without trial of American citizens. Indeed, I believe that doing so would break with our most important traditions and values as a Nation." Although the Obama Administration has consistently claimed the power to kill U.S. citizens without charge or trial in the war on terror, as it did to the radical cleric Anwar al-Awlaki in Yemen, the president now promises not to imprison them.

Of course, a future president still might

There's more...

Promises, Promises: President Obama’s NDAA Signing Statement

This time last year, President Obama responded to the 2011 National Defense Authorization Act with a signing statement. Objecting to the law's restrictions on the transfer of Guantanamo detainees to the U.S. for trial or to their home countries, the president promised: "My Administration will work with the Congress to seek repeal of these restrictions, will seek to mitigate their effects, and will oppose any attempt to extend or expand them in the future." (My emphasis).

This past New Year's eve, President Obama signed the 2012 National Defense Authorization Act, or NDAA. In doing so, he extended the Guantanamo transfer restrictions, while also codifying the indefinite detention without trial of suspected terrorists. In the statement he issued with that signature, he said:

"I have signed this bill despite having serious reservations with certain provisions that regulate the detention, interrogation, and prosecution of suspected terrorists."

The pledge to seek repeal and oppose expansion of transfer restrictions had melted into a watery "reservation."

The president's Saturday statement also makes a new promise.

"I want to clarify that my Administration will not authorize the indefinite military detention without trial of American citizens. Indeed, I believe that doing so would break with our most important traditions and values as a Nation." Although the Obama Administration has consistently claimed the power to kill U.S. citizens without charge or trial in the war on terror, as it did to the radical cleric Anwar al-Awlaki in Yemen, the president now promises not to imprison them.

Of course, a future president still might

There's more...

Promises, Promises: President Obama’s NDAA Signing Statement

This time last year, President Obama responded to the 2011 National Defense Authorization Act with a signing statement. Objecting to the law's restrictions on the transfer of Guantanamo detainees to the U.S. for trial or to their home countries, the president promised: "My Administration will work with the Congress to seek repeal of these restrictions, will seek to mitigate their effects, and will oppose any attempt to extend or expand them in the future." (My emphasis).

This past New Year's eve, President Obama signed the 2012 National Defense Authorization Act, or NDAA. In doing so, he extended the Guantanamo transfer restrictions, while also codifying the indefinite detention without trial of suspected terrorists. In the statement he issued with that signature, he said:

"I have signed this bill despite having serious reservations with certain provisions that regulate the detention, interrogation, and prosecution of suspected terrorists."

The pledge to seek repeal and oppose expansion of transfer restrictions had melted into a watery "reservation."

The president's Saturday statement also makes a new promise.

"I want to clarify that my Administration will not authorize the indefinite military detention without trial of American citizens. Indeed, I believe that doing so would break with our most important traditions and values as a Nation." Although the Obama Administration has consistently claimed the power to kill U.S. citizens without charge or trial in the war on terror, as it did to the radical cleric Anwar al-Awlaki in Yemen, the president now promises not to imprison them.

Of course, a future president still might

There's more...

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