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There has been an alarming increase in foreclosures since the end of 2006, including 1.7 million foreclosure proceedings between January and August of this year alone. This is a complex issue that will not be solved with a one-size-fits-all solution.
Yet with political will and a return to responsible lending practices, we can stem the foreclosure crisis and help the millions of families that are on the brink of losing their homes. To do this, we need to enact a range of policies and programs, both state and federal, that are designed to address the immediate needs of borrowers straining to avoid foreclosure, contain the current crisis, and reform anti-predatory lending laws and borrower protections to avoid another mortgage meltdown in the future.
How Do Foreclosures Effect Communities?
Home foreclosures have a devastating effect on those families who lose their homes, as well as far-reaching implications for surrounding neighborhoods, communities, and states.
A recent study of foreclosures in Chicago found that every foreclosure causes, on average, a 0.9 percent decrease in value to all other properties within one city block. For homes in low- to moderate-income areas the decrease in home value can be as high as 1.8 percent—an almost $2,000 loss in property value. And for neighborhoods with multiple foreclosures the resulting decrease in property value can be staggering. Foreclosures that occurred in 1997 and 1998 reduced property values by $598 million in Chicago; because nationwide foreclosures have increased since 1998, it is reasonable to assume that these numbers would be low estimates for the current mortgage crisis.
What's more, Congress' Joint Economic Committee has released a report arguing that the mortgage crisis is due, in part, to this decrease in property value. When property values began to decrease in 2006, some borrowers with adjustable rate mortgages owed more on their loans than the property was worth. Because the property values were not increasing along with interest rates, borrowers were left without the ability to refinance or sell their property, and foreclosures became more common.
This sets up a vicious cycle in which declining property values lead to rising foreclosures, which, in turn, depress property values. The Joint Economic Committee reports that if housing prices continue to decline, by 2010 as many as 2 million families may lose their homes because of subprime mortgage foreclosures. That will result in a loss of over $100 billion in housing wealth either directly or indirectly associated with those foreclosures. This decrease in property value will lead to a reduction of property tax revenue to the state and local governments of more than $917 million.
Local and state governments rely on property tax revenue to pay for a variety of expenditures, including police, fire departments, and schools. Decreasing property tax revenues will increase the strain that many municipal governments are already under to pay for effective law enforcement and fire protection and fund our schools at the level they deserve. The Joint Economic Committee's report has a spreadsheet and map that shows the amount of property tax loss each state is expected to lose as a result of the expected foreclosures.
Increased crime, paired with a smaller pot of money to spend on public services, is another real threat of the foreclosure crisis. According to a report by William Apgar of Harvard University, and Mark Duda, a senior fellow at the Joint Center for Housing Studies, the costs to a city when a property goes into foreclosure can vary from $27—if there are no problems with the foreclosure—to $34,000, if the property is abandoned and damaged by fire. The majority of foreclosures fall somewhere in between.
Foreclosed properties can become havens for criminal activity, vandalism, and general physical disorder. Dan Immergluck of the Georgia Institute of Technology and Geoff Smith of the Woodstock Institute released a report showing that three foreclosures in 100 owner-occupied properties will increase the amount of violent crime in the neighborhood by almost 7 percent.
Police officials in Chicago interviewed by Apgar and Duda further "cited the damage to quality of life from empty, foreclosed properties, including gang activity, drug dealing, prostitution, arson, rape, and murder." These conditions increase the necessity of additional police patrols, and in the instance of arson, additional fire protection. These costs can range from several hundred dollars per incident to over $10,000 to suppress a fire, and these strictly monetary costs do not take into account the additional risks the police take when patrolling these properties or the extreme danger of controlling a fire in an abandoned building.
Because most municipalities operate on a strict budget, the increased cost of police patrols and fire suppression must come from other sources, including schools, parks and recreation, or public works. The mortgage crisis is an epidemic the United States cannot afford to leave unchecked. The millions of families left without homes, the increased crime and decreased economic activity, and the extra strain on our vital resources must be addressed.
Getting Relief to Those Who Need it Most
It is clear that if the mortgage crisis continues as predicted, there could be devastating consequences. Yet there are clear steps we can take at the federal and state levels to minimize and reverse the effects of the crisis.
The Center for American Progress therefore strongly advocates the creation of a new Home Owners Loan Corporation, which would buy out existing mortgages at reduced prices from the investors who currently own the loans and offer the borrowers safe, fixedrate loans at up to the appraised value of the home. This federal program would target those individuals who owe more on their loans than the appraised value of their homes, who traditional lenders will not refinance.
A Home Owners Loan Corporation loan would allow the borrower to stay in the home, potentially offer investors a reasonable return on an otherwise non-performing investment, and, perhaps most importantly, break the vicious cycle of foreclosure, property devaluation, and abandonment that can have long-term negative effects on neighborhoods and entire cities.
Many industry experts point to credit counseling as one of the least expensive ways to help those dealing with the crisis. Also, many lenders are more willing to renegotiate or modify the terms of a loan if there is a third party involved and if the borrowers make contact as early as possible. Yet, we currently see that even with credit counselors' assistance, not all loans can be modified to prevent borrowers from losing their homes. To date, most of the modifications offered appear to be in cases of temporary hardship, like an unforeseen medical bill, and not in cases where the loan terms themselves are the principal cause of the difficulty in making payments.
Absent loan modification, refinancing may be the best option for at-risk borrowers. The challenge comes when many of these borrowers are unable to refinance through existing private or public lending programs. For some borrowers, the revised Federal Housing Administration Secure program or a conventional loan conforming to Fannie Mae or Freddie Mac's criteria may be an option. But in cases where the existing loan balance now exceeds the value of the home, there are few, if any, options.
Accordingly, a program must be set up to aid those who, for one reason or another, are ineligible for loan refinancing from traditional sources. Programs could be modeled after the existing ones in Massachusetts or Ohio. The programs should be tailored to those individuals who are below a certain income level, who live in the home being foreclosed on, and who cannot receive a loan from others sources. These state programs could receive funding from a variety of places, including private lenders, selling public bonds, and other public financing.
Without the government designing a program specifically to help them, many individuals will not find relief and will most likely lose their homes when their interest rates jump.
Preventing Future Mortgage Meltdowns
States must enact stricter regulations concerning lending practices in order to prevent similar crises in the future. The current crisis was facilitated by a relaxation of lending standards by financial institutions to individuals that could not afford the loans they were given.
The norm for lending has long been a monthly payment that is roughly equal to one-third of a borrowers monthly income. In the period leading up to the current crisis, lenders were writing loans for up to and exceeding one-half of a borrowers monthly income. When lenders returned to more stringent lending requirements, the borrowers were not eligible for refinancing and were stuck with adjustable rate mortgages they could not afford.
There need to be regulations in place that would stop lenders from making these poor loans. North Carolina has enacted some of the strictest laws regarding lending practices and is a good model for other states to follow.
The federal government may have failed to take substantive action to assist homeowners, but several states have pioneered new programs and proposals to combat foreclosure. These new programs are a proactive first step in the process of addressing our nation's widening mortgage crisis. However, much more needs to be done to expand these programs in order to include more homeowners facing foreclosure before they can be considered truly effective.
Massachusetts offers loan refinancing and counseling for predatory loan victims; Michigan's state legislature is considering two new bills designed to protect homeowners from losing their residences; and Ohio's ambitious new program helps eligible homeowners convert to a fixed-rate mortgage. These programs demonstrate the innovative thinking and legislation currently being carried out on the state level.
Massachusetts
Massachusetts Governor Deval Patrick announced a five-point, statewide plan last month to help homeowners keep their houses. Gov. Patrick's plan builds on several Massachusetts programs which are already in place. One such program is the Massachusetts Housing Finance Agency's Home Saver Foreclosure Prevention Program.
The Home Saver program is directed at moderate-income homeowners who have been victimized by unfair lending practices; it combines counseling with loan refinancing services for those who qualify. The Housing Agency refers participants to an approved local counselor who helps review mortgage documents. After completing counseling, participants are referred to lenders in order to refinance their existing loan.
MassHousing offers additional loan refinance programs for homeowners under different circumstances. The MyCommunity Refinance Loans, also aimed at homeowners nearing foreclosure, is open to those who fall within specified income limits. For those who are ineligible for Home Saver counseling and refinancing, this program offers fixed interest rates, which can help subprime mortgage holders.
Michigan
Detroit's foreclosure rate is the highest for any city in America. Recognizing the pressing need for relief, last month Michigan Governor Jennifer Granholm introduced two initiatives that would help homeowners. The Adjustable Rate Mortgage Refinance Program is designed to assist in refinancing an adjustable rate mortgage to a lower interest fixed rate loan. The second program, the Rescue Refinance Program, is aimed at individuals who have a delinquency on their mortgage and who are in immediate danger of losing their home. Both programs would be financed through the sale of bonds.
While the state legislature considers these bills, the Michigan State Housing Development Authority has begun operating the "Save the Dream" information hotline and website. These resources offer helpful contact information, an overview of the foreclosure process, and guides to credit and prioritizing debt. The Save the Dream program helps ensure that all state residents have access to guidance and information via phone and Internet.
Ohio
Ohio offers the Opportunity Loan Refinance Program for homeowners who are struggling to continue to meet monthly mortgage payments. This program's eligibility requirements are more flexible, bring more help to more homeowners. In order to qualify, residents must meet income guidelines and live in the property that is being refinanced.
The program began in April 2007, but it aims to help 1,000 homeowners over the course of the year. The Opportunity Loan Refinance Program provides a 30-year, fixed rate mortgage and counseling to eligible homeowners, financed through the sale of $100 million of taxable bonds.
Ohio's legislature has also taken steps to combat predatory lenders. In June 2006, the state legislature passed the Homebuyer Protection Act (SB 185). This law protects borrowers by restricting predatory lending practices. It bans lenders from offering a loan knowing that a borrower will not be able to repay; refinancing a loan when there is no benefit to the borrower; taking advantage of illiterate borrowers; financing credit, life, disability, or unemployment insurance premiums as part of a loan; charging multiple late fees for a single payment; and enforcing a prepayment penalty on first lien mortgages of less than $75,000. Ohio's two programs serve both combat unfair practices and assist community members.
CAP's Andrew Jakabovics Discusses Modern Day HOLC.
Highlights:
"The expectation is that by the end of the year we will be well in excess of 1 million foreclosures across the country, which is a shockingly high number."
"If you recognize that this has sort of a huge snowballing effect on individual values within a given community, the loss in home equity can be particularly severe in these places."
"I think there was certainly a philosophical blindness to the extent of the problem. The Federal Reserve Chairman for a long time kept indicating that the subprime crisis was largely contained. Obviously the growing evidence is that in fact it's not, and he has now come around and acknowledged that the problems in the housing markets are likely to be a problem for sometime into the future."
"I think that increasing the amount of homeowner counseling, is certainly a good first step" and "tighter lending standards prohibiting certain predatory lending practices is particularly important."
Read the full interview here. Or download and listen to the complete audio (.mp3, 13 min, 11.6mb)
Congress is in recess for the Thanksgiving holiday until Dec. 3. |
