Posted by Leonard Steinberg on May 9th, 2014

The New York Times has an opinion editorial by Peter Dreier about the housing recovery. While housing has recovered extremely well in large Urban centers and some other parts, reports about rising home prices suggest that the tens of millions of people whose homes lost value just have to wait until the recovery reaches their neighborhood to lift them out of crisis. But this housing recovery is bypassing many US cities and towns.

  • The total value of America’s owner-occupied housing remains $3.2 trillion below 2006 levels.
  • 9.8 million households still owe more on their mortgages than the market value of their homes. Thats 20% of all mortgaged homes.
  • Almost five million households that have already suffered through foreclosure since the housing bubble burst in 2007.
  • More than 10 million Americans, spread across 23 states, live in ZIP codes where between 43% and 76% of homeowners are under water.
  • Places with so many underwater homes are toxic; they depress the value of surrounding homes and undermine local governments’ fiscal health.
  • The bulk of the blame lies with banks’ risky, reckless and sometimes illegal lending practices, although blame also lies with reckless, politically motivated government legislation that forced banks to make loans to a much wider group of buyers who probably shouldn’t have bought a home at all…..this editorial strangely omits this point.
  • It was explicit Federal policy to force lenders to make loans in formerly red-lined non-credit worthy areas, to make available mortgage loans of up to, or even more than, the purchase price and to offer “liar loans” with no proof of the ability to repay required. How easily we can forget this. Should those who took on loans responsibly be punished by having to pay for those who knowingly took on more than they could handle?
  • Mortgage brokers lied or misled borrowers about the terms of mortgages, often pushing borrowers into high-interest subprime loans, even when they were eligible for conventional mortgages…..
  • Minority areas were targeted (sometimes encouraged by the Federal government). In 2006, when subprime lending was at its peak, 54% of blacks, 47% of Latinos and 18% of whites received high-priced loans, according to the Federal Reserve Board. Of course no-one was forced to take on these loans.
  • In almost two-thirds of the hardest-hit ZIP codes, African-Americans and Latinos account for at least half of the residents.
  • The banks’ risky loans came crashing down, devastating communities and causing financial havoc. The federal government rescued the banks, but nobody came to the rescue of the communities the banks left behind.

So what is the solution? Banks and other financial institutions should modify underwater mortgages to their current market value, an approach called “principal reduction.” If lenders rewrote the loans to reflect fair-market values, owners would have lower monthly payments, which would free them to put millions of dollars into local economies. Cities would have more stable property tax revenues, and lenders would ultimately benefit by having fewer delinquent loans.

Many banks no longer own the loans they made: They pooled large numbers of subprime loans into private securities and sold them. The companies that service these securities generally refuse to countenance the idea of “principal reduction.” Yes, some homeowners have been able to persuade lenders to reset their loans, but most get the cold shoulder or a bureaucratic runaround.

In 2012, some of the biggest banks signed a settlement agreement with 49 state attorneys general to modify mortgages, but many of them continue to heap abuse on their customers, and sufficient relief has not reached trapped homeowners.

The Obama administration created several initiatives to help troubled borrowers, but these programs do not require banks to reset loans as a condition of getting federal funds…. these initiatives sound nice politically and buy votes, but in reality they are not being enforced.

The government’s Home Affordable Modification Program has helped only one-quarter of the four million homeowners it was supposed to reach.

The federal government has actually been an obstacle to reform: The F. H. A, which oversees Fannie Mae and Freddie Mac, has refused to allow these two mortgage giants to reduce the principal on underwater mortgages that they own or guarantee. All it would take is for President Obama’s new appointee as F.H.F.A. director, former Representative Melvin Watt, to change the policy, an action that does not require congressional approval. He should do so immediately.

Some municipalities have been trying to take matters into their own hands. Late last year, Richmond, Calif., was the first city to develop a plan to use its power of eminent domain to buy underwater mortgages at their current market value and to refinance them, but many other localities are likely to follow. A number of responsible for-profit and nonprofit lenders stand ready to do business with them so that local governments don’t have to use tax dollars to purchase these loans.

Dealing with this problem on a city-by-city basis may not be the most efficient way to confront a national crisis, but in the face of Wall Street intransigence and federal indifference, cities have had to find their own way to restore the lost wealth of their constituents.

Until the housing mess is cleaned up, the US economic recovery will remain weak and benefit only a small segment of the country. Cleaned up, the economy would SOAR.