America's foreclosure crisis isn't over
With Goldman Sachs (GS) recently agreeing to pay $5.1 billion to settle claims related to its role in the 2008 mortgage scandal, the firm became the latest big Wall Street bank to reach a deal with the U.S. government. As part of the settlement, $1.8 billion is to be set aside for programs to help homeowners who are still trying to fend off foreclosure?
Yet nearly seven years since the Great Recession ended, the question remains: How well have these anti-foreclosure programs worked? It depends on whom you ask and where they live.
Back-stopping the nation's banking system was the top federal priority during the height of the 2008 financial crisis. But out of the $475 billion that Congress authorized for the Troubled Asset Relief Program (TARP), $46 billion was supposed to help millions of struggling families avoid foreclosure.
A subsequent 2014 settlement between prosecutors and Bank of America (BAC) netted an additional $16.6 billion, of which then-Attorney General Eric Holder said $7 billion would go to "provide relief to struggling homeowners, borrowers and communities affected by the bank's conduct."
All told, between the programs administered through the Treasury Department -- like the Home Affordable Modification Program (HAMP) -- and the pools of money committed by Wall Street banks as part of their settlements, tens of billions of dollars have been set aside to assist families facing foreclosure by modifying their mortgage terms so they can remain in their homes.
Today, foreclosures are down nationally, and the number of mortgages that are current on their payments is on an upward swing at 93.9 percent, according to a report issued last month by the Office of the Controller of the Currency. The OCC survey is based on an analysis of 42 percent of the nation's mortgages.
The number of homeowners who are "underwater," with a house that's worth less than what they owe on their mortgage, was down to 4.3 million in the third quarter of 2015, compared to 5.2 million in 2014, according to CoreLogic, a real estate analytics firm. For context, back in 2011, 11.6 million households were underwater.
Mark McArdle, the Treasury Department's deputy assistant secretary for financial stability, told CBS MoneyWatch that the Obama administration's efforts to help homeowners played a pivotal role in these improvements to the housing market.
"Treasury has a variety of programs to assist struggling homeowners, with the goal of helping to prevent avoidable foreclosures and stabilize communities," McArdle said. "The Home Affordable Modification Program has helped more than 1.5 million homeowners avoid foreclosure, while the Hardest Hit Fund has assisted more than 250,000 homeowners across participating states."
McArdle acknowledged this effort isn't complete. "While the housing market has recovered in many parts of the country," he said, "several areas and states are still struggling, and we will continue to help homeowners and communities in those places still recovering from the housing crisis."
However, critics of the government's anti-foreclosure strategy have never been hard to find. While the Justice Department pursued large payouts from the Wall Street banks instead of criminal prosecutions, the Treasury Department created a multibillion-dollar suite of programs, which induced the very same banks to service the mortgage modifications with billions of dollars of taxpayer-funded incentive payments.
In 2013, Christy Goldsmith Romero, special inspector general for TARP, warned that homeowners were defaulting on their modified loans at an "alarming rate." In the IG's most recent quarterly report to Congress in September 2015, the rate of default on these reset mortgages increased greatly over time.
For borrowers who first sought mortgage relief under HAMP when the program was launched in 2009, the redefault rate is nearly 53 percent. Overall, more than a third of people who have participated in the program over its lifetime have redefaulted.
"The longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program," Romero's office concluded, a damning indictment for an initiative that has already far undershot the Obama administration's prediction in 2009 that it would help upwards of 9 million homeowners adjust their mortgages to avoid foreclosure.
From 2009 through 2015, 2.2 million households applied for a trial modification, the first step to getting a permanent reset, but roughly 786,000 canceled. Of the remaining 1.4 million granted HAMP modifications through Treasury, some 467,000 ultimately redefaulted.
This wave of redefaults cost taxpayers $1.8 billion dollars in TARP funds that were paid as incentives to the banks and mortgage servicers to participate in the modification program.
In most states, 35 percent of homeowners could not keep the terms of their modification, setting themselves up for another default or foreclosure. In some states the default rates are running even higher: For example, it's 44 percent in Mississippi, 42 percent in Louisiana and 40 percent in Nevada.
According to thousands of calls received on the SIGTARP hotline, problems with the banks and mortgage-servicing companies that handle the mortgage modifications are contributing factors to the default rate. Complaints about lost paperwork and clerical errors are common. According to SIGTARP, so-called "dual tracking" is also an issue. That's a practice in which the servicer of the HAMP mortgage will continue to pursue foreclosure, even while the homeowner is in the HAMP program.
"Nobody wants to deal with the reality that these mortgage modifications were not affordable long term," said Kathleen Engel, a research professor at Suffolk University Law School in Boston and author of "The Subprime Virus: Reckless Credit, Regulatory Failure and Next Steps." Said Engel: "[The mortgage modifications] were all predicated on the property values appreciating in value, but they actually declined."
The national aggregate drop in foreclosures masks troubling trends in many of the communities where property values have continued to drop, pushing more families deeper underwater, according to John Powell, director of the Haas Institute at the University of California at Berkeley. He said in many American cities, especially in minority neighborhoods, the number of foreclosures and abandoned homes have severely depressed real estate values since the 2008 collapse.
"When the government was saying the crisis was over," said Powell, "we had thousands of neighborhoods in places like Ferguson, Missouri, where a disproportionate number of homes were underwater and the government did not step in."
According to "Underwater America," a report published by the Haas Institute, 71 of the 100 cities with the highest rate of underwater households have a population that's more than 40 percent African American and Latino. All told, more than 10 million Americans live in one of 395 so-called "hot spot" ZIP codes, where between 43 percent and 76 percent of homeowners are trapped in underwater mortgages and heading for foreclosure.
For community activists hoping for a sustainable long-term housing turnaround, the key challenge has been to break this cycle of depreciating real estate values, often exacerbated with higher property taxes as municipalities scramble to make up for a shrinking tax base.
"If you don't help us with $20,000 to tear down two derelict houses on a street, you will see people walk away from $200,000 mortgages on that same street," said Jim Rokakis, vice president with the Cleveland-based Western Reserve Land Conservancy and director of the Thriving Communities Institute. Rokakis has pioneered the creation of urban land banks to help hard-hit communities demolish derelict structures and refurbish what can be saved.
In some Cleveland neighborhoods, one in five homes are abandoned compared to one in 10 across the whole city. According to the U.S. Department of Housing and Urban Development, there are 2.5 million vacant homes in the hardest-hit 25 American cities.
Late last year, Rokakis and his colleagues made a persuasive case in Washington documenting that in neighborhoods where derelict structures were removed, the rate of foreclosure declined. The argument is based on a detailed study that the Western Reserve Land Conservancy had commissioned. Both Congress and the Obama administration signed off on a $2 billion appropriation to fund the demolition of these "zombie" homes in the hardest-hit states as part of the recently enacted $1.1 trillion government spending bill.
Yet community activists say the fact that so many homes across America were permitted to fall into disrepair is proof that the federal response just hasn't been aggressive enough to contain the damage from 2008. "I commend the Department of Justice for taking on the banking industry," said Frank Ford, an attorney and senior policy adviser with the Western Reserve Land Conservancy. "But when they had the leverage, they did not close these settlement deals in a way in which the proceeds could hit our streets fast enough."