“These are families that had the American dream and stability, and lost their homes and their roots,” said Rep. Joe Baca (D-CA) during his keynote address at a Center for American Progress Action Fund event yesterday entitled, “The Multifaceted Mortgage Crisis: Identifying Solutions to Protect Families and Neighborhoods.” Baca was referring to the one in 43 families in his home counties of San Bernardino and Riverside, California who are facing foreclosure on their homes.
A panel of experts joined Rep. Baca to discuss solutions to the current mortgage crisis in the United States, including Jeanne Fekade-Selassie, Homeownership Specialist at NeighborWorks America; Andrew Jakabovics, Associate Director for Economic Mobility Program, Center for American Progress Action Fund; and Jef Kinney, Vice President for Innovation Development, Fannie Mae. The event also coincided with the release of a Center for American Progress report entitled, “Throwing Homeowners a Lifeline: A Proposal for Direct Lending to Qualified Troubled Borrowers.”
During his address, Baca described H.R. 4135, a new piece of legislation he is introducing, outlined in “Throwing Homeowners a Lifeline,” which will create a new temporary government entity, the Family Foreclosure Rescue Corporation, to finance loans to people in foreclosure or serious default on their payments. It reintroduces a concept created by the Roosevelt administration during the Great Depression called the Home Owners’ Loan Corporation, which provided emergency refinance assistance to families who could no longer make their mortgage payments.
A program such as the FFRC is sorely needed, with an estimated 1.8 million homeowners holding subprime mortgages with interest rates that reset this year or will reset before the end of next year. Twenty two percent of adjustable rate subprime loans are currently delinquent, and 3.84 percent of subprime loans entered foreclosure in the second quarter of this year, according to the new CAP report. Borrowers with adjustable rate mortgages can expecttheir average monthly payments to increase between 30 to 50 percent when the rates reset.
“This legislation will allow more people to stay in their homes,” Baca said. “These are people who cannot receive assistance under current federal law. They got into a situation that was not explained to them by people trying to make a fast buck. The government was not there to keep these families from predatory lenders. Hopefully with your support we can move this bill forward and help these families keep their homes.”
The problem of massive foreclosures doesn’t end with families losing their homes. The problem has large-scale social costs as well, and can cause weighty expenses for local governments in the form of diminished taxes and decreased services.
“An increase in foreclosures leads to an increase in criminal activity,” said panelist Jef Kinney. “There is a ‘spiralling’ effect in which one home will be foreclosed and go down, bringing down the value of other homes around it. Less homeownership in an area leads to less taxes and reduced revenue to local governments, and a decrease in expenses for services such as police protection and the fire department.”
Fannie Mae, where Kinney works, started its own program to help homeowners called the HomeStay initiative, which helps families refinance subprime mortgages and allows them to remain in their homes. So far, $10 billion in subprime mortgages have been refinanced through the program although not everyone facing the mortgage crisis qualifies for such programs.
The FFRC would address families who are precluded from refinancing because of negative home equity caused by declining house prices. Andrew Jakabovics, the Associate Director for the Economic Mobility Program at the Center for American Progress Action Fund and the author of the new CAP report outlining the FFRC, explained that the FFRC will help those who have good credit histories but are not eligible for other programs because of the housing market decline. Their loans are “underwater,” meaning they owe more on their mortgages than their homes are worth.
“The FFRC is a short-term government corporation,” Jakabovics explained. “It refinances creditworthy borrowers with negative equity. It offers fixed-rate, 30-year fully amortizing mortgages. This [the FFRC] has the potential to be a profitable enterprise in the long run. It works within existing servicer contracts and returns profit to the U.S. Treasury with only minimal start-up.”
Designed to operate at minimal cost and risk to taxpayers, the FFRC would buy up existing non-performing mortgages at a discount and offer mortgage holders corporate bonds in their stead. The FFRC is designed to help at-risk borrowers, stabilize neighborhoods, and potentially restore liquidity to the capital markets from the bottom up. The temporary corporation would accept applications for three years, at which point it would only exist to service the loans it made. Baca’s legislation, if passed, would create the FFRC and begin the process of helping families who have nowhere else to turn.
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