Quick fix: Recent Mortgage Settlement Still Leaves Latino Homeowners Vulnerable

By Janis Bowdler, Director, Wealth-Building Policy Project, NCLR

Sign Of The Times - Foreclosure
Photo: Jeff Turner.

With all the commotion that surrounded the fiscal cliff debate, it was easy to overlook the recent news of yet another new mortgage settlement that will pay cash to homeowners who experienced fraud or abuses committed through mortgage servicing. The settlement replaces the Independent Foreclosure Review (IFR)—an enforcement action made by the Office of the Comptroller of the Currency (OCC) against servicers under its supervision for violations in the foreclosure process—with $8.5 billion in cash payments. Not only does the amount pale in comparison to the need, the abrupt change in approach also puts the credibility of the entire process in jeopardy.

The Independent Foreclosure Review (IFR) was a terribly flawed enforcement action during which banks hired independent consultants to assess abuses and compensate the homeowner. The project was severely inefficient and used an underwhelming amount of public outreach to inform families that it was there to help them. As a result, participation was low; as of December 13, only 356,000 of the estimated 4.4 million families eligible have filed for assistance. To further muddy the waters, several of the reviewing groups chosen to serve as “objective” entities were not actually disinterested parties. Though the OCC claimed to thoroughly vet such groups, they have since removed some participants due to conflicts of interest.

The good news is that the settlement could reduce the immense cost and bureaucracy required to conduct the reviews, thereby speeding aid to families who have been waiting much too long. However, this is small consolation in light of the potential pitfalls of this approach. The deal—which was negotiated with an alarming level of secrecy—could leave struggling homeowners with another failed program. The deadline to file a request for review was pushed back several times because of inadequate outreach conducted by OCC and the servicers, evidenced by the dismal participation rates. In fact, despite launching in November 2011, the OCC and servicers only implemented a dedicated campaign to reach hard-hit neighborhoods, including communities of color, over the last six weeks. Moreover, we have not seen any data indicating whether or not the outreach was successful.

Poor outreach notwithstanding, news reports suggest the OCC has arbitrarily determined that those who filed for a review will be awarded greater compensation, even though this has nothing to do with a person’s level of harm. It is not fair to determine after the fact that filing for a review entitles you to a higher level of compensation. If families knew about this in advance, they would have been more likely to file before the agreement.

That the sluggish IFR process halted in such an abrupt and nontransparent manner is truly unfortunate, as it will undoubtedly impact millions of Americans and the economy as a whole. Experience shows that quick fixes come up short in delivering relief and justice to families who have been irreparably harmed by wrongful foreclosures and other servicing abuses. If corrective action is not taken, the OCC will miss yet another opportunity to help the most harmed families, reinforce accountability through data collection, and lay tracks to avoid future offenses.

The Federal Housing Administration: Unsung Hero of the Housing Market

By Jose A. Garcia, Policy Fellow, Wealth-Building Policy Project

The Federal Housing Agency (FHA) is one of the unsung heroes of the housing market.  Despite helping to save the housing market following the mortgage crisis in 2007, the FHA is continuously attacked, erroneously, for its commitment to provide mortgage liquidity in times of need and encourage lending to low income households.

American Enterprise Institute (AEI) recently released a report on the riskiness of the Federal Housing Administration’s (FHA) lending practices.  The report conflates and confounds data to reach misleading conclusions and recommends unnecessary changes.  FHA’s current financial challenges are overwhelming due to loans insured between 2007 and early 2010 as well as a single loan product:  seller-financed mortgages.  However, its losses are not due to creditworthy borrowers with lower credit scores and lower down payments, and AEI would do well to remember that correlation is not causation.  Furthermore, FHA no longer insures seller-financed loans.

If that is not enough for you, let’s look into this further.  For decades, lenders have been able to successfully provide reliable and sustainable mortgage products to low income communities across the country that are profitable for the markets and fair to vulnerable borrowers. A decade long study conducted by UNC Center for Community Capital of 46,000 low-income homeowners found that of those who received traditional 30-year, fixed-rate mortgages with a small down payment, 95% of homeowners were paying their mortgages. UNC’s study shows that correctly structured home loans to low-income households perform quite well, leading to sustainable homeownership and sound business opportunities for lenders.

For many low- and middle-income American households and communities of color, the FHA is a critical part of the mortgage lending repertoire to access homeownership.  By insuring loans made by private lenders—even during severe economic downturns—the FHA provides stability to the housing market and access to credit.  This was never truer than after the recent housing crisis, when credit became difficult to access and many lenders turned to the FHA.  Now the 78-year-old agency may need help to continue its good work, and if it does, American taxpayers should lend a hand.  Doing so benefits not only families looking to purchase their first home but the economy at large.

The FHA helped hold down the fort as the housing market reeled from the aftermath of bad loans and Wall Street greed.  Based on an analysis by Moody’s analytics, the agency’s actions in 2011 alone helped prevent housing prices from decreasing an additional 25% and from a 40% decrease in the sales of new and existing homes, saving three million jobs and half a trillion dollars in economic output.  By stepping in, the FHA rescued tens of thousands of middle-class families from losing their home equity and, in many instances, their homes.  The agency did this by backing a larger share of mortgage originations as private investors fled the housing market.  At the peak of the housing bubble,  FHA insured one-third of loans made in 2009, compared to 5% before the alarms rang in 2006.

Despite the important role that the FHA played in keeping the housing market from total economic collapse, Edward Pinto from AEI stated that, “This paper reports on a comprehensive study that shows the FHA is engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes.”  Fiscal projections point to a shortfall between what the FHA needs to cover all its claims over the next 30 years and how much it has on hand.  FHA’s possible shortfall was not caused by lending to low- and middle-income households but rather due to maintaining liquidity in the housing market.  The shortfall does not mean a definitive need for taxpayer monies to cover it—it will be months before we know that for sure.

The FHA has already addressed unsustainable programs that contributed to its trouble.  Its seller-financed down payment assistance program, which called for the originator to cover the down payment, often resulted in originators inflating the purchase price of a home in order to do so.  This in turn led to financially unstable loans, especially during the recession, that resulted from the subprime debacle.  Congress banned the program from FHA insurance in 2008, after FHA had tried to eliminate the program for years.

While the seller-financed down payment program did not work, most FHA products do.  Low- and middle-income borrowers and communities of color have benefited from sustainable and profitable mortgage loans insured by the FHA.  The FHA provides a necessary service that the conventional market does not provide.  However, by pointing fingers at the FHA, critics are undermining the ability of an agency that has been critical in keeping the mortgage market accessible and affordable, providing sustainable pathways to homeownership for millions of Americans.

With Dream of Homeownership Threatened, Candidates’ Silence on Housing Issues Elicits Frustration

By Janis Bowdler, Director, Wealth-Building Policy Project

How do you convince somebody to fix a problem when they are seemingly blind to the overwhelming evidence that the problem even exists? Today, 11 million Americans owe more on their mortgage than their home is worth. Analysts predict that we will see an estimated two million foreclosure filings this year with millions more at risk of losing their homes. As a result, hundreds of thousands of senior citizens are losing their economic security, children and families are being uprooted, and neighborhoods are blighted with vacant properties.

The nation’s housing market is in a precarious position, and despite millions of homeowners across the nation bearing the brunt of the housing crisis, too few of the decision-makers on Capitol Hill are championing the necessary solutions to protect the American Dream of homeownership. And in the midst of a presidential election, the onus falls on the two candidates to carve out serious proposals to navigate homeowners out of this colossal mess. But when political strategy dictates that its best for both candidates to avoid the issue altogether, it becomes incredibly challenging to push for the type of national conversation we need.

Recently the Home for Good campaign—a collaboration of more than 70 civil rights, community, and public interest groups—reached out to homeowners across the country for help. In the end, nearly 40,000 people signed on to our call, asking the presidential candidates to offer real solutions to:

  • Stop needless foreclosures
  • Expand affordable rental housing
  • Revive a sustainable path to homeownership

Along with signatures of tens of thousands of concerned voters and advocates, we have offered a blueprint for restoring home opportunity called the Compact for Home Opportunity. We have made it especially easy for them. The Presidential candidates have our signatures and a plan, now the ball is in their court.

It’s important for both candidates to remember that while they may choose to skirt the issue until Election Day, there will be no hiding from the housing crisis over the next four years. Housing has traditionally led previous recession rebounds, so it is no wonder that our economic recovery has dragged alongside a weak housing market. We must address the crushing mortgage debt overhang, keep families in their homes, and bring new homeowners into the market.

Important housing policy questions are looming. Will the candidates lean on Fannie Mae and Freddie Mac to stop dual tracking, a practice that moves families through foreclosure before they know if they could qualify for a loan modification? Will they give away resources for housing counseling and low-income renters in the pending “Grand Bargain?” It’s these kinds of details that have been completely absent from both candidates’ platforms.

The financial crisis has decimated neighborhoods, wiped out family wealth, and ruined financial futures, but it has not changed the central role the home plays in our lives. We continue to seek shelter with a few basic amenities—safe streets, good schools, and access to quality jobs. It is time that candidates speak frankly with voters and explain what they plan to do to ensure that families who dream of owning a home can make that dream a reality.