The Center for Responsible Lending contends that within five years 13 million foreclosures will occur in addition to the nearly 5 million since the recession began. Yet President Obama in his 71-minute State of the Union address puzzled home counselors across the nation by failing to mention, even fleetingly, the growing foreclosure crisis.
As a result of mounting criticism the president recently announced, with Sen. Harry Reid in Henderson, Nev., that he would support a creative, though grossly underfunded, homeowner relief program. It provides $1.5 billion for homeowners whose mortgages are deeply underwater, or who are unemployed, in five of the hardest-hit states: California, Florida, Michigan, Arizona and Nevada.
This may be sufficient to help the more than 100,000 families facing foreclosure in Nevada but hardly sufficient for the 1.5 million such families in California, much less those in the other three states.
Our nonprofit counseling intermediaries, who are approved by the Department of Housing and Urban Development, focus on and serve three of the five hardest-hit states, Florida, California and Nevada. We will be urging the president, Congress and regulators to take additional actions consistent with the president's campaign promises.
Our suggestions are in the context of a failed Home Affordable Modification Program. Hamp so far has produced only a 3% permanent loan modification rate among the expected 4 million homeowner beneficiaries (116,000 permanent modifications). This failure has occurred despite $75 billion in federal subsidies to servicers for loan modifications.
In accordance with the president's campaign promises, we urge strong support for Sen. Richard Durbin's bankruptcy reform plan that would give judges authority to substantially reduce loan principal amounts. We will also advocate the major foreclosure moratorium the president suggested during his campaign, applicable to all homeowners who have lost their jobs since Jan. 1, 2009.
Consistent with the president's campaign praise of Main Street community organizers, we will ask the administration to match the recent $1.5 billion foreclosure program designed mainly to help Nevada by allocating $1.5 billion in unused Troubled Asset Relief Program funds to HUD-approved home counselors, the true community organizations protecting embattled homeowners.
This would amount to about $1,000 each for 1.5 million homeowners most likely to be saved by effective counseling. (This would be half the $2,000 the administration is offering as incentives for servicers to accept short sales.)
We will also be submitting to the president a plan to reduce loan principal to a home's fair market value when families are underwater, with a provision that servicers could recover half or more of any future appreciation.
As counselors, we do not advocate that the 4.5 million deeply underwater homeowners just "walk away." However, a growing number of experts are recommending this, and many wealthy investors exercise this remedy when their investments go sour. To minimize homeowners' "walking away," we also urge the administration to:
- Let deeply underwater homeowners remain in their homes as tenants with an option to repurchase. Fannie Mae and Freddie Mac are developing such models, though they are not yet sufficiently comprehensive to effectively address the problem.
- Consider the GSE models of working with HUD-approved nonprofit counselors to directly help borrowers. With appropriate financial support, comparable to what is given the servicers, we are confident that home counselors will well exceed servicers' embarrassingly low 3% permanent loan modification record.
- Require that the GSEs' information on predatory lending be made available to borrowers so that they can negotiate or renegotiate fair loan modifications; the GSEs have used their information to return these predatory mortgages to the originators.
The public and Congress have supported Paul Volcker's re-emergence as the president's leading financial institution adviser. Perhaps the public would be similarly pleased should the president, in considering these options, consult with Main Street's champion, Sheila Bair, the chairman of the Federal Deposit Insurance Corp. (The FDIC's principal reductions and use of HUD-approved home counselors have so far been the only even partly successful administration model.)