“All the bank bailouts in the world cannot bring America out of this crippling recession if we don’t fix the problem that started it in the place,” said Sen. Richard Durbin (D-IL) on the importance of addressing the housing crisis at a Center for American Progress Action Fund event on the impact of foreclosures and what Congress can do to prevent them.
Durbin’s remarks preceded a panel moderated by Andrew Jakabovics, CAP Action’s Associate Director for Housing and Economics, which discussed other issues surrounding the rising number of foreclosures in the United States. Panelists included Martin Gruenberg, vice chairman of the Federal Deposit Insurance Corporation; Keith Ernst, senior policy counsel to the Center for Responsible Lending; and David Wecker, a principal at Magnetar Capital and an investor in mortgage-backed securities.
Assessing today’s housing market was central to Durbin’s address. He said that legislative fights would continue “because the crisis is not over.” Home values rose 0.3 percent in July—their first increase in 33 months—but he argued that we must “contextualize” this data by looking at other economic indicators, including last month’s 9.4-percent unemployment increase. Gruenberg echoed Durbin and said the foreclosure crisis will likely continue into next year and may get worse before it gets better.
Durbin and the panelists agreed that further action is needed. “There are a lot of different incentives that people in the market place have,” said Ernst, who suggested that a third party—perhaps government—could help align them.
Durbin suggested that Congress “should pass legislation to allow homeowners to stay in their homes by paying fair market rent” and “provide funding for cities and states that want to provide mandatory mediation programs.” A recent CAP report, “It’s Time We Talked,” written by Jakabovics and Alon Cohen, argued that the federal government should take a more direct role in providing opportunities for mediation.
The Obama administration created the Making Home Affordable Program, or MHP in February, which helps at-risk homeowners keep their homes by refinancing or modifying their loans. The program has already begun 250,000 trial modifications, but all eligible homeowners may not be receiving MHP-compliant modification or refinancing offers.
The CAP paper therefore proposed that the federal government provide more opportunities for mediation through a number of ways, including funding state and local mandatory mediation programs or requiring mediation for all federally insured home mortgages. The report also offered a number of best practices for state and local governments to use in implementing mandatory mediation programs based on programs up and running in different states.
Gruenberg spoke about the Federal Deposit Insurance Corporation’s experience modifying mortgages serviced by IndyMac, which the FDIC took over last summer. He said that the IndyMac modifications, which influenced the structure of modifications the Treasury Department chose to use under MHP, have had a redefault rate of only 18 percent. He also commented on a recent study released by the Federal Reserve Bank of Boston that argued that modification is often less desirable to investors than foreclosure.
Touching on the IndyMac experience, Gruenberg said, “I think we’ve already demonstrated using the net present value test, taking self-cure and redefault risk into account, that substantial, successful loan modifications can be undertaken that will help keep thousands of people in their homes with beneficial results for their communities and for the national economy.”
Ernst was committed to finding policies that would avoid foreclosure because of its large externalities. “The consequences of foreclosure are not confined to the two-party members,” he said. There are also social costs to foreclosure, including the impact on nearby homeowners and local taxpayers.
Revising a section of bankruptcy law that allows for any secured asset to be adjusted in bankruptcy court except homes could also help reduce foreclosures. Durbin has tried to change this law twice, and he is “not opposed to trying again.” He does not know if he has enough votes to pass the changes, but he said colleagues have told him that the housing crisis was “going from bad to worse” and they “wanted to take another look.”
Wecker cautioned against dealing with only mortgage debt instead of the entire matrix of debt that contributes to foreclosure. He said banks should be at the table to discuss other forms of debt, namely credit cards and home equity loans.
Determining the appropriate next step for the housing crisis is not an easy task. But with the likelihood of continuing foreclosures the panel consensus was clear: More aggressive actions should be taken to keep borrowers from foreclosure.