What would you do if the mortgage you took out a few years back suddenly cost twice as much as your house is worth?
Millions of Americans have faced that question since 2008. Many learned the hard way that you don’t get much say in what happens next once your mortgage goes underwater. Time and again, lenders refused to negotiate a new deal to reflect the collapsing market value of people’s homes, and chose to foreclose on them instead.
The foreclosure crisis has largely slipped off America’s news radar over the past few years. And understandably so: The share of homes that are worth less than what the owner owes on her mortgage has been cut in half since 2011. But even after that dramatic drop in so-called negative equity, more than 7 million homeowners were still underwater on their mortgages as of early 2015.
Those struggling homeowners have their best shot of grabbing the nation’s attention back this week as the presidential race heads to Nevada, where the aftershocks of the housing crisis keep rumbling today.
Nevadans still live in one of the hardest-hit housing markets of any state, and have throughout the crisis. As the foreclosure rate receded nationwide last spring, Nevada’s went back up by 10 percent. The state’s foreclosure rate is fourth-highest in the country, and families routinely spend years battling for their homes. The average completed foreclosure last year in Nevada had been going on for 629 days before it was resolved.
Radio Silence In Nevada
Nevada’s distressed home loans are still caught in economic quicksand, but not for lack of trying to combat banker haste with consumer-oriented ideas. The National Council of La Raza (NCLR), for example, has invested significant donor funds in efforts to bail out underwater borrowers when banks won’t negotiate fairly.
“You want to keep families in place if possible, so foreclosure is the absolute last choice that we want, if we’re involved in the transaction,” NCLR Vice President for Housing and Community Development Lot Diaz told ThinkProgress.
Diaz’s colleagues at an affiliated non-profit called Hogar Hispano purchase distressed mortgages and then return the homes to the owners at a fair market price that restores their chances of building up equity in the property. Hogar Hispano did 463 of these distressed debt acquisitions in 2013 alone, and saw a favorable outcome for the original homeowner in 316 of those cases.
Hogar Hispano also buys up houses that have already been taken over by the bank, known as REO properties, and then finds a buyer for them or converts them into rental units targeted at low- and moderate-income families. The group says its REO work has created close to 900 new homeowners and turned bank-owned homes into occupied housing more than 1,100 times, in Nevada and elsewhere.
With foreclosure issues so prevalent in the third state to vote in the primary, you’d expect both campaigns to hone in on the subject.
About a week before Nevada’s caucuses, Hillary Clinton released a $25 billion housing plan as part of her broader Economic Revitalization Initiative proposal. It includes money to build new affordable housing and fix up existing units. It would both boost federal programs to subsidize affordable housing and retool the rules of such programs to give low-income participants greater choice about where to live. The bulk of the plan focuses on promoting homeownership by fighting discrimination in mortgage lending and matching low-income families dollar-for-dollar as they save for a down payment (up to a maximum of $10,000).
It’s a detailed plan, as far as campaign season policy proposals go. And though Sanders has pledged a sterner hand with Wall Street in general, his campaign could not provide a comparable policy paper on housing. Staffers instead pointed ThinkProgress to Sanders’ affordable housing achievements at both the local and national levels, and his pledge to a disability rights group to push for higher federal spending on housing.
Clinton’s more clearly stated ambitions on housing sketch out a broader range of steps to make life easier for renters and homeowners alike. But it says nothing about foreclosure mitigation work.
As the Nevada race peaks, neither campaign seems to have anything to offer for tackling the lingering foreclosure crisis.
A Looming Deadline
The silence can’t be explained by a lack of clear ideas. The work Hogar Hispano has done in Nevada and elsewhere isn’t unique. There are other non-profit groups performing a similar service, giving the consumer-oriented ideas a clear track record of success.
Take Boston Community Capital (BCC), for example. BCC’s Stabilizing Urban Neighborhoods initiative (SUN) buys up underwater loans and gives them back to their initial owners on new, affordable repayment terms. SUN has spent about $100 million to buy almost 500 distressed loans, BCC CEO Elyse Cherry said in an interview, and delivered a 40 percent average reduction in housing costs for the families living in them.
SUN focuses its resources on low-income areas where mass foreclosures threatened to tear apart whole communities and negate decades of public investments in buoying housing opportunity and economic stability for Americans on the edge.
“Many middle- and upper-class communities have rebounded, but in low-income communities, home prices have stagnated,” Cherry said. “And people who got mortgages during the bubble tend to be seriously underwater. So what we do is find homeowners who are in default or foreclosure who can’t afford to pay a mortgage at the bubble price, but can pay one at the current market price.”
When SUN steps in, the bank that would rather foreclose than absorb the cost of the house’s drop in value gets paid what it wants. Participating families not only get to stay put, but also get to reposition themselves financially such that the house is once again a viable long-term investment. “The goal,” Cherry said, is “true homeowners, meaning they have a stake in the home because they’re within reach of true equity.”
The non-profit initiative is doing what progressive critics of federal housing finance policy have been calling for since the initial crisis. Washington only partially adopted those ideas in the Home Affordable Modification Program (HAMP), the Obama administration’s signature initiative for preventing foreclosures.
HAMP has earned a great deal of criticism for failing to deliver the kind of true homeownership and buy-in that Cherry describes. It also arrived two years after banks first began aggressively and unjustly foreclosing on underwater borrowers, too late for millions.
But HAMP still provides key protections for homeowners. Or at least it will until the end of this year when the program expires, National Council of La Raza (NCLR) Vice President for Housing and Community Development Lot Diaz said in an interview.
HAMP “gave a lot of families the opportunity to stay in their house” who likely would’ve been rushed into foreclosure otherwise, Diaz said. “The issue now really is what happens post-HAMP. That’s one set of issues I think it’s critical for [Democratic presidential candidates] to discuss.”
For the millions of Americans and thousands of Nevadans still underwater on their loans, the looming expiration of HAMP combined with a lack of political attention to the remnants of the foreclosure crisis has to be worrying.
They are about to lose one of the few formal protections they have from banks’ traditional sprint to foreclosure. The primary is offering little assurance that a Democratic president would prioritize their specific issues. And existing federal efforts to involve consumer nonprofits in unwinding the distressed mortgage market have been blasted by progressives for instead delivering a giveaway to hedge funds.
But how big a deal is it that Clinton and Sanders’ housing plans each leave foreclosure work in the shadows?
Keeping underwater families in their homes doesn’t require federal spending, BCC CEO Cherry said, and programs like SUN could be scaled up without public investments. The initiative is fueled by private capital from philanthropic groups and other investors.
That doesn’t mean the government can necessarily take a hands-off approach here as HAMP’s requirements sunset, though. Diaz fears a sudden return to aggressive foreclosure activity the second HAMP goes dark.
CREDIT: AP Photo/Jae C. Hong, File
“Now the big thing in post-HAMP discussions is called the ‘streamlined mod.’ You offer a family a deal, but you don’t require any documents, you don’t look at what their income is. If they can take the deal, great, and if not you move to foreclosure,” he said. It’s the opposite of what Hogar Hispano and SUN do today, and it would push huge numbers of people off a financial cliff instead of salvaging a place for them in the economy’s virtuous cycle.
“I worry that we won’t learn anything from all of this,” Diaz said.
What Can The Next President Do To Create More ‘True Homeowners’?
Curbing the market’s desire to go straight back to hasty, inflexible foreclosure practices after HAMP ends will be an important part of the next president’s job on housing issues. By using public authority to encourage corporate bigwigs to adopt SUN’s stability-oriented logic, Cherry said, the government could help to promote ideas for clearing out the millions of mortgages that remain underwater that don’t displace defaulted borrowers who could become paying customers again with the right re-financing.
“Convene all the mortgage lenders. Let’s have a realistic conversation about what [home price] appreciation levels are likely to be in communities where incomes aren’t rising. And let’s talk about how to keep those communities stable,” Cherry said. “If we want to put carpenters and people who put up wallpaper back to work, we need to have positive equity and to keep people in their homes.”
The kind of partnership between private capital and public institutions that Cherry describes would fit perfectly within Clinton’s track record. She has repeatedly endorsed the idea of tackling complex social problems by recruiting for-profit partners rather than — or in addition to — fighting for budget resources with lawmakers. Sanders, meanwhile, argues that the proper approach to making change requires massive public resources and close government involvement.
A Sanders White House would be more likely to push for renewing HAMP with more aggressive rules and a much bigger budget. In a sense, HAMP lies in the no-man’s land between these two ideas: It used taxpayer money but relied on private cooperation, and fell far short of achieving its goals. Either candidate might look to renew and reform the program before it expires, but they would likely emphasize very different pieces of the policy and propose very different reforms to it.
It remains to be seen whose approach will win more Democratic hearts. In the meantime, groups like Cherry’s will continue their alchemy of private cash and public interest – but she doesn’t hate the idea of a stronger hand in Washington.
“If the federal government would take this over,” Cherry laughed, “I would happily go out of business in a heartbeat.”