By Ezra Klein
Washington Post Staff Writer
Thursday, October 14, 2010; 8:12 PM
If you didn't think the gods of financial crises had a sense of humor, consider that the latest economic threat is that foreclosures have largely stopped. What's next? Our (401)ks are looking too full?
Although the potential for chaos in the housing market and on bank balance sheets is rightly feared, there's an opportunity here, too. Foreclosures have paused. There's renewed recognition that the business practices behind the housing bubble were a mixture of insane and fraudulent.
The banks will probably need some government help again, even if it's just regulatory forbearance. The market is preparing for the possibility of new policies - and we should have some, but not just for the banks. For the homeowners, too.
Our response to the financial crisis had three parts: The bank and auto bailouts, the stimulus, and the efforts to help homeowners facing foreclosure. The bailouts worked pretty well. The stimulus was much too small, but at least did what it said it was going to do. The help for homeowners, however, has been a disaster.
Blame the Home Affordable Modification Program. It's a voluntary program in which participating mortgage servicers can renegotiate terms with struggling homeowners, give them three months at a trial rate, and then, in return for some federal money, make the new terms permanent.
Most of the homeowners who were eligible for the program were never told of it. Many of those who did enroll were bounced out after the three-month trial. Others have been left in limbo for months. Most of the program's money hasn't even been spent.
Meanwhile, we're on track to see a record number of foreclosures this year, and then we're predicted to set another record in 2011.
We can do better. Here are four ideas kicking around the community of experts who follow the housing market.
1) Repair HAMP: The problem with HAMP is that it leaves mortgage modifications up to the banks, and they're not much interested in modifying those mortgages. The Center for American Progress wants to see that turned around: They'd have the Treasury Department empower housing counselors to modify the mortgages (modification works through a standard formula), and banks would have three months in which to challenge the new terms. Given the banks' evident facility with paperwork, this seems like nothing less than common sense.
2) Cramdown: The original theory of HAMP was that it would be the carrot - it's a voluntary program with a government payout - but there'd also be a stick. That stick was cramdown, or mortgage modification. "You can trace a lot of HAMP's problems back to the failure of cramdown," says Pat Garofalo of the Center for American Progress.
"Cramdown" was shorthand for empowering bankruptcy judges to modify the principal on mortgages. "If Lehman Brothers goes into bankruptcy," says Julia Gordon, senior policy counsel at the Center for Responsible Lending, "all their debt can be restructured. No one says we can do it all but the single most important thing."
But that's effectively what the bankruptcy process says to homeowners, and it means that banks have little incentive to work toward a voluntary agreement with them. Cramdown would make sense on its own terms and encourage banks to participate in HAMP.
3) Mandatory mediation: The lesson of the foreclosure mess is that the banks really aren't paying attention to the mortgage paperwork. But they're supposed to. In fact, there's a whole section in the mortgage rules about the advice and attention they're supposed to be giving distressed homeowners.
A mandatory mediation program would force them to sit down with homeowners, look through the papers, consider the specifics of the situation, and in the presence of housing counselors or even a judge, make a good-faith effort to figure out a way forward. A program along these lines has been extremely successful in Philadelphia.
4) Right-to-rent: Under a right-to-rent program, foreclosed homeowners would have the option of renting their home at fair-market value for five years. This means less disruption for them and fewer vacant properties blighting communities. Fannie Mae has been attempting a variant of this, but on a very small scale.
We should expand the program, particularly in areas where the housing market is extremely depressed. "It's got to be better than just throwing people out onto the street," says Dean Baker, the director of the Center for Economic and Policy Research. "The bank would be getting rent. They could sell the property, though it might have a tenant for five years. But given the situation these people are in, it's a bare minimum the government could do."