Foreclosure Prevention Begins at Home
Congress has probably done all that we can expect to prevent foreclosure with the housing bill passed last month. Because of its poor design, the Congressional Budget Office projects that it will only help 260,000 families facing foreclosure.
This bill also gave Fannie and Freddie a pass, bailing out its stockholders and its hugely overpaid and incompetent managers (competent managers don't put companies into bankruptcy) while imposing no real conditions on these companies' conduct. Congress only imposes conditions when the issue is welfare for poor people.
Among other things, Congress could have required that Fannie and Freddie follow the model that Sheila Bair of the FDIC is pursuing following its takeover of the bankrupt subprime lender IndyMac. She has stopped foreclosures on IndyMac's mortgages and is trying to arrange workouts with homeowners.
There is also Representative Raul Grijalva's Saving Family Homes Act, which would give homeowners facing foreclosure the option to stay in their home for up to 20 years as renters paying the market rent. But no one expects Congress to pass this one any time soon.
That means that the task of protecting homeowners will fall to state and local governments, and the homeowners themselves. Fortunately, there are steps that can be taken.
States can also pass "own to rent" laws comparable to the Saving Family Homes Act. These laws give homeowners security in their home. If they like their house, the neighborhood, the schools for their kids, they can at least stay there as renters.
By denying the lenders the easy option of evicting the family, this measure also hugely alters the lender's calculation on foreclosure. Banks are likely to decide in many cases that it makes more sense for them to arrange a workout that allows the homeowner to remain in their house as an owner than to be a long-term landlord.
Keeping people in their houses as tenants is also a much better solution for neighborhoods, many of which are now faced with a glut of foreclosed properties. These empty homes are blights on the neighborhood.
Delaware State Treasurer Jack Markell has proposed giving homeowners facing foreclosure a rental option as part of his campaign for governor. Legislators in other states are considering similar measures.
In addition, the homeowners themselves can work together with community groups to make the foreclosure process as difficult as possible for banks, thereby encouraging them to consider renting or other alternatives. There are often many legal technicalities that can slow a foreclosure process. There is no reason that homeowners should not seek to take advantage of these options in order to improve their bargaining position. A Boston based group, City Life/Vida Urbana, is pursuing this strategy, which has been successful in keeping many homeowners in their homes.
Congress has largely failed the millions of homeowners who now find themselves in desperate straits as a result of the collapse of the housing bubble, but that does not mean that there is nothing that can be done. The American people have long experience dealing with the consequences of economic mismanagement by those at the top levels in business and government. The collapsed housing bubble gives people yet another chance to take the lead.
Dean says: "Banks are likely to decide in many cases that it makes more sense for them to arrange a workout that allows the homeowner to remain in their house as an owner than to be a long-term landlord."
But... we don't know that they will do this. What if they start new landlording divisions and figure out how to profit from turning owners into tenants? If the goal is to coerce the banks into renegotiating mortgages then I don't see why we should be so indirect about it as Dean's plans suggests. We could, if we wanted, just pass a law that forces banks to renegotiate mortgages based on pre-bubble prices. We could invalidate all upside down mortgages. We could have a moratorium on foreclosures. We could pass a law that says banks have to extend loan terms and offer substantially lower payments before they can foreclose.
Dean has said, from time to time, that some people simply can't afford to keep their homes. I don't see it. If they can afford to pay market rent, they can afford to keep their homes. Just extend the term of the loan so that market rent will eventually pay it off. Sure the lender might have to wait another 10 or 15 years for their money and that might tick off some of the hedge funds who bought these securitized loans but... who cares?
August 3, 2008 11:05 AM | Reply | Permalink
I'm afraid I don't see how Dean's plan will effect the repair of bank balance sheets -- the prime if not sole purpose of these legislative activities.
August 3, 2008 11:44 AM | Reply | Permalink
Good title "Foreclosure Prevention Begins at Home". Unfortunately, I have numerous conceptual problems with our housing "crisis". Basically, the problem is that we had housing buyers and mortgage companies gaming the system. Now they are in trouble and all of a sudden it becomes the responsibility of government to bail them out?
One of the biggest misunderstanding in our perception that home ownership is a method of building wealth. This is wrong, wrong, wrong, wrong!!!!! At a simplistic level, when the so-called value of a house goes from $100,000 to $120,000, the value of the house has not really increased. What has happened is that your dollar has declined to $0.84. In part, this is a reflection of easy credit. Easy credit simply allows us to spend more than we normally could, which is inflationary. This inflation is disguised as an increase in the "value" of your house.
The fix, unfortunately would be the elimination of easy credit. The elimination of easy credit however is politically unpalatable since the poor working single mother of 23 kids who only graduated from grade school would not be able to own a home. The solution to our foreclosure prevention does begin at home. Don't buy what you cannot afford. Now, if we can come up with a suitable punishment for the lenders.
August 3, 2008 1:36 PM | Reply | Permalink
Steve R, where did you learn to think so clearly?
Are you some kind of malicious troll?
You seem to be complaining when Congress demands that the 95+ of us who pay our mortgages on time also pay for those who can't afford to buy a house.
It is simply the redistribution of wealth.
Marx would be delighted in the direction our country is headed.
August 3, 2008 4:13 PM | Reply | Permalink
Steve R and VintageClub--
But the government has already decided to bail out the people who brought about the crisis. Will it make you feel better to see people evicted, people who may not be able to rent an apartment for years? We need more homeless kids? Is this just because the victims of foreclosure are easy? Everyone can find someone who behaves badly. (My own badly behaved are those who have quit paying their mortgages, move out of the soon-to-be-foreclosed houses and rent the places out to unsuspecting tenants. Ninth circle of hell...)
As for Marx, I think he'd note that this is exactly what he'd expect of a political structure that serves the interests of the bourgeoisie. Marx viewed capitalism with a somewhat jaundiced eye, and would have been very much aware that capitalists who fail are not expected to face the same punishment as, say, workers. Class struggle and all that.
August 3, 2008 5:32 PM | Reply | Permalink
I really get a kick out of the 'blame the victims' crowd. Many of the people we are bailing out were preyed upon by unscrupulous lenders who misled people into believing that they could afford to buy a house. Is the 'mother of 23 kids' gonna be the next 'Cadillac driving welfare queen'? I see a racial bias in your characterization too.
And for specifically for VintageClub...you seem to show outrage that borrowers are being helped but are missing the point that the lenders are the people benefiting the most. The money isn't being redistributed to the masses in some kind of Marxist way...it is being redistributed to the wealthy in a plutocratic way. Our government is subsidizing and encouraging 'moral hazard'...which only benefits the wealthy at the expense of the rest.
August 3, 2008 11:40 PM | Reply | Permalink
Great post. Thanks for pointing out that these "bail outs" have nothing to do with home owners. if the government really wanted to help home owners it could very easily pass a law that says: "No foreclosures until loan terms are adjusted so that people can stay in their houses, as owners, even if that means adjusting the term of the loan to a 75 year payoff." Not saying the government should do that (actually, it's not a terrible idea) but the government could do it. The government can, at any time, forbid foreclosures and force lenders to rewrite contracts in ways that are more favorable to borrowers.
That's not what the government is doing.
The government is, instead, protecting "liquidity" by trying to make sure that banks and other lenders don't fail.
I see a lot of complaints about people borrowing to live beyond their means but... so what? That's how lenders make money. And it's the lenders right now who are asking for and getting the government assistance. The government hasn't done jack for borrowers.
August 4, 2008 1:02 AM | Reply | Permalink
Actually the government has done something for the borrowers Destor. It has allowed them to be preyed upon by laissez faire deregulation of the lending market. ;-)
But liquidity of the financial institutions is great cover story when trying to help privatize profits while socializing loss. It is all about protecting the investors and shareholders. And a few crumbs get thrown to people to have them believe their best interests are being taken care of. To borrow one of Josh's favorite words...it's a bamboozlement. And in fact, in some cases, helping out the borrowers might just be delaying unavoidable bankruptcies and allowing the lenders to get more money before those bankruptcies occur. But bottom line those borrowers will still be paying and the lenders won't have to write off all of the 'bad loans' they were greedy enough to make.
August 4, 2008 1:31 AM | Reply | Permalink
August 4, 2008 2:44 PM | Reply | Permalink
Missing word
turn its back on FAMILIES on television
August 4, 2008 2:46 PM | Reply | Permalink
States can also pass "own to rent" laws ...
By denying the lenders the easy option of evicting the family
Maybe not.
Article I, section 10, clause 1:No State shall... pass any ...Law impairing the Obligation of Contracts
August 4, 2008 3:41 AM | Reply | Permalink
but see, per contra:
Home Building & Loan Association v. Blaisdell
290 U.S. 398(1934)
Holding
Minnesota's suspension of creditor's remedies was not in violation of the U.S. Constitution. Minnesota Mortage Moratorium Act upheld.
August 4, 2008 3:49 AM | Reply | Permalink
It's not that hard.
Make all foreclosures judicial and man the state's Chancery Court Clerk's foreclosure section with one intern -- maybe a summer intern.
Then, along Dean's lines provide an alternative, voluntary mortgage modification process in the landlord-tenant court.
What we need is more Jarndyce and Jarndyce.
August 4, 2008 5:25 AM | Reply | Permalink
Some excellent argument...
Nonetheless, I continue to look for something that the "government" does well.
When the evil lenders make a mistake, they pay and can correct. When government steps in to solve the problem and makes a mistake, it never corrects and the mistake ends up adding to the bankrupting of the country.
Without sounding Libertarian, can't we leave the Government out of helping the lenders as well as the poor "victims"?
We all have the chance to be winners, although at the risk of losing and having to start over again.
I will gladly take that approach over having the geniuses in Congress and the White House regulate our lives and businesses!
August 4, 2008 11:32 AM | Reply | Permalink
State and local governments can take all sorts of actions, particularly to protect tenants whose landlords are foreclosed. One of the easiest is to impose rent control and just cause eviction. (Sorry, Dean, I know economists all hate rent control.) This would give the lenders the option of continuing to rent to the sitting tenant or paying that tenants compensation, as required for eviction not the tenant's fault. Some just cause laws provide for major compensation--enough for the tenant to make a down payment on the house.
August 4, 2008 12:52 PM | Reply | Permalink
Some just cause laws provide for major compensation
Beware the state pre-emption of local just cause eviction laws. In California, despite the best efforts of such thoughtful jurisdictions as Berkeley and San Francisco, state law premits a landlord (or new purchaser) to "retire" from the landlording business, the said "retirement" being just cause to evict.
The exemption thus swallows up the rule.
August 4, 2008 1:47 PM | Reply | Permalink
But why must we punish the landlord?
He paid for the property, pays the taxes and bears all liabilities.
How about telling the tenant to leave, period. If the tenant isn't happy with that arrangement, he can earn enough money to buy his own house.
Ouch! That is asking for a lot personal responsibility.
August 4, 2008 5:14 PM | Reply | Permalink
Yes it is asking a lot of personal responsibility.
None of us suggest that the "Nanny State" help people pay for a trip to Disneyland. We do suggest that having a roof over your head is sufficiently close to a natural right that it's appropriate for the Government to help.
After WW2 both parties in the UK provided "council housing" which in effect meant the state was the landlord of last resort. I worked in a " New Town" which consisted entirely of such housing- but lived elsewhere in the "stockbrokers' belt". My neighbors-perfectly nice people, none of whom ever visited the New Town- swapped cocktail party anecdotes about how unhappy or uncouth the New Town inhabitants were : "keeping coal in the bath tub". All completely untrue as I knew from my everyday experience.
We all make personal ethical choices, one of which is how much we want the government to do. Mine is that the government should aid in "the pursuit of happiness". You disagree.Fair enough.That's why we have elections.
August 5, 2008 5:55 AM | Reply | Permalink
Wouldn't it be better to let people keep their earned income, rather than force them to send it to the fools in Washington to determine how to assist us in the "pursuit of happiness."
Could we let the private charitable institutions help the desperate, which we can fund voluntarily, and let the rest of us pursue happiness through smart decisions and hard work?
August 5, 2008 9:01 PM | Reply | Permalink
man the state's Chancery Court Clerk's foreclosure section with one intern
Ahh yes, the clerical bottleneck.
I am reminded of the Reagan NLRB, where *all the administrative judges were retained, but only **three secretaries transcribed their decisions; it took roughly ten years for an a union unfair labor practice win to go from the close of hearing to enforcable order.
*Judges, being creatures of the ruling class, fancy themselves essential and are best left employed, once rendered impotent. Withal I am given to understand that the morale of Labor Dept Administrative Judges was adversely by the disrespect.
**(big layoff...)
August 4, 2008 1:36 PM | Reply | Permalink
Disgusted with congress that this is the best they came up with! More bailouts for mismanaged companies and Wall Street.
August 4, 2008 1:54 PM | Reply | Permalink
Ah, but jollyroger, true, but the landlord then has to pay compensation if it's required under the law. It's considered an eviction that isn't the tenant's fault.
August 4, 2008 2:53 PM | Reply | Permalink
You are correct, at least as regards San Fran.
"Relocation Benefits Update: On June 21, 2006, the California Supreme Court upheld the legality of relocation benefits adopted by the Board of Supervisors in 2005. These benefits are $4,500 per tenant (up to a maxmimum of $13,500 per household) plus an additional $3,000 for each tenant who is senior or disabled."
http://74.125.45.104/search?q=cache:nLVwKlJMf4oJ:www.sftu.org/ellis.html+ellis+act&hl=en&ct=clnk&cd=1&gl=us&client=opera
August 4, 2008 8:31 PM | Reply | Permalink
I think the Federal government should start a Direct Mortgage program, similar to the direct student loan program. Once in a lifetime, every adult citizen should be able to buy or refinance one home, on a 30 year fixed mortgage at the prime rate. The maximum mortgage payment should be the traditional 28% of the buyer's gross income.
If the owner dies, their heirs should inherit the house and the Direct Mortgage with it. If there are no heirs, the government should sell the property for its Direct Mortgage balance or the market price, whichever is less. Eventually there would develop a supply of Direct Mortgage steals: houses selling for much less than they're worth. There should be a means-tested lottery system for lower-income buyers to win the right to buy these properties.
The owner should be allowed to prepay their own Direct Mortgage or transfer it to another qualified owner at the same terms. Wages should be garnished and assets seized to prevent defaults. Only living human adults should be eligible for any kind of Direct Mortgage transaction and private contracts involving Direct Mortgages should not be enforceable. Corporations and speculators need not apply.
This would be a real bailout for homeowners, with the added benefit that lenders get paid, too.
August 4, 2008 6:41 PM | Reply | Permalink