Don’t Be Quick to Blame the Borrower (National Housing Institute Rooflines)

By Katherine Lucas-Smith
March 22, 2010

“The borrowers werent risky so much as the loans were risky,” said Michael Calhoun, the president of the Center for Responsible Lending in offering a rebuttal to the argument that the foreclosure crisis was the result of government policies that allowed individuals who were incapable of successfully owning homes to receive mortgage loans. His response elegantly and succinctly gutted the baseless assertion that low-income individuals are inherently unworthy of homeownership, and set the tone for the conversation that followed.

Mr. Calhoun’s remarks were part of a plenary session titled “The Foreclosure Crisis: The Next Wave,” that took place this month at the National Community Reinvestment Coalition’s 2010 National Conference. The plenary, moderated by NCRC CBO James H. Carr, brought together five experts in a conversation about the future of the foreclosure crisis, foreclosure prevention efforts, and the role of governments and non-profits in stabilizing and then rebuilding the hardest-hit communities.

In addition to Calhoun, who concentrated on the devastating effects of foreclosure on underserved communities, Alys Cohen, a staff attorney at the National Consumer Law Center, addressed the Obama Administration’s Making Home Affordable programs, particularly the Home Affordable Modification Program (HAMP). Erika Poethig, the Deputy Assistant Secretary for Policy Development and Research at the U.S. Department of Housing and Urban Development (HUD) spoke about the imminent wave of foreclosures on multi-family properties. Geoff Smith, Senior Vice President at the Woodstock Institute, spoke about his research on foreclosure trends in the Chicago area. Finally, Craig Nickerson, Executive Director of the National Community Stabilization Trust, commented on returning foreclosed homes to productive use and tactics that can contribute to comprehensive revitalization strategies in foreclosure-ravaged communities.

Calhoun threw the big picture numbers and broad trends into sharp relief with the reminder that more than one million African Americans and more than one million Latinos will lose homes—far greater proportions of total foreclosures than their population shares should warrant. He concluded that the foreclosure crisis will be most detrimental not to investors, lenders, or brokers, but to the same vulnerable and underserved communities that are also hardest hit by unemployment, restricted access to credit, and other consequences of the recession.

Similarly, Smith provided analysis of trends such as the increasing lag time between a borrower reaching the point of 90 days late on payments and the lender actually filing a foreclosure notice. His research reveals that there are fewer days from the date of the first foreclosure filing to the date of lender repossession for African-American borrowers than for white Caucasian borrowers. Furthermore, he has found that real estate owned (REO) properties located in majority African-American neighborhoods sit on lenders books 25 per cent longer than REO properties in neighborhoods where African Americans are not the majority. Smith concluded his presentation with the recommendation that the best way to help distressed homeowners is to keep them in their homes even as they enter foreclosure.

Poethig described more than $500 billion in securities backed by mortgages on multi-family properties that will mature in the next year but are currently underwater. HUD anticipates that the next wave of foreclosures will include large numbers of rental properties. Tenants bear the brunt of the hardship—as security deposits are lost, utility services are shut off, and buildings are not maintained—and will also face reduced options for finding new rental housing, particularly at rents affordable to low- and moderate-income levels. During the Q&A period, an audience member asked Ms. Poethig what the administration and HUD were doing to educate or make requirements related to the responsibilities of lenders who suddenly become landlords through foreclosing on tenant-occupied properties. She replied that lender outreach was currently being conducted mainly at the state level, but that Congressman Keith Ellison (D-Minn.) was working on legislation to address those issues.

Alys Cohen shifted the conversation from analysis of the foreclosure crisis itself to an evaluation of the federal governments response to the massive increase in foreclosures. As one of the foremost experts on the design, implementation, and capacities of the Home Affordable Modification Program (HAMP), her insights helped audience members identify what they could do to improve HAMP or work to prevent foreclosures through different channels. HAMP, according to Cohen, has thus far failed to provide relief to most distressed homeowners who have attempted to get mortgage modifications. She listed a number of flaws, particularly the lack of transparency and accountability from Treasury, lenders, and servicers. Cohen recommended that audience members who are dissatisfied with HAMP call their Representatives and Senators and write to the White House and the Treasury to demand better. She also praised state- and local-level efforts such as the mandatory mediation programs in Maine and Philadelphia and recommended them as models for other areas.

Finally, Nickerson focused on what must be done to clean up the mess left behind. He mainly addressed the challenges related to putting REO and vacant properties back into productive use. Given that more than 6 million foreclosures have taken place since January 2007, one of the biggest challenges is getting those properties into the hands of communities that have been locked out of REO sales thus far. Right now, most REOs are purchased by investor partnerships which buy numerous homes in bulk, sight unseen, often with cash. Non-profits and community groups are priced out because they need financing and cannot take advantage of the economies of scale realized when purchasing large quantities. Nickersons organization, National Community Stabilization Trust, is a non-profit partnership that aims to achieve some of the same advantages enjoyed by investors, with the goal of returning the benefits to communities in need by preserving the properties as affordable and returning them to occupancy.

The take-away themes of the plenary were sobering: while many people are celebrating the beginning of economic recovery, in truth, the foreclosure crisis is only about half done. Many more foreclosures are on the horizon over the next several years, probably peaking in 2010. These foreclosures will be different than what we have seen so far: they will be driven by long-term, intractable unemployment and negative equity, and they will impact prime, fixed-rate borrowers, those with resetting ARMs or interest-only loans, and tenants in multi-family buildings whose landlords go through foreclosure. While there are some successful tactics and strategies to prevent foreclosure at the federal, state, and local level, their ability to succeed is limited by conflicts of interest, capital adequacy, and long term unemployment. The most important foreclosure prevention program, HAMP, is failing and unlikely to improve greatly. Finally, future economic growth and the ability of our most vulnerable populations to recover from the Great Recession will continue to be constrained by ongoing foreclosures for the next several years.

Overall, this plenary session provoked a rare mix of reactions: on the one hand, it strongly reinforced the message that all the economic pain that communities have dealt with over the past several years is only the beginning, and that the consequences of inaction will continue to be severe. On the other hand, the expertise and dedication that the speakers and moderator brought to the forum energized an audience of seasoned non-profit advocates to keep fighting on behalf of their communities.

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