A realistic fix for the mortgage crisis
President Obama recently announced that the federal government will take steps to reduce interest rates on mortgages for some existing homeowners. Unfortunately, that won’t help millions of U.S. homeowners already in foreclosure and millions more about to join them.
The current foreclosure crisis is not due to poor choices by individual homeowners. Most people caught up in it fell prey to a national bubble and bad lending practices. These taxpayers — schoolteachers and medical technicians, salesclerks and mechanics, veterans and parents of soldiers in Iraq and Afghanistan — are often simply people who got in over their heads. They deserve a second chance.
One reason the mortgage industry hasn’t done more, its leaders say, is that it fears creating a “moral hazard” — the concept being that if homeowners in default are given too much help, other homeowners might be tempted to deliberately default in order get the same help. That hasn’t been the experience of Boston Community Capital, a 27-year-old nonprofit, community development finance institution I’ve led for 14 years.
As part of its Stabilizing Urban Neighborhoods initiative, Boston Community Capital has renegotiated many mortgages on foreclosed homes, and we’ve seen no evidence that doing so sets off a flood of voluntary defaults. We believe our model could be applied much more widely in this national crisis.
Foreclosure isn’t something a homeowner chooses if it can be avoided. Today, a good credit score is required for countless transactions, and foreclosure destroys a person’s credit score. In many states foreclosed homeowners can’t qualify for another mortgage for many years, nor can they easily rent houses, qualify for college and car loans, or even get some jobs.
Since 2009, Stabilizing Urban Neighborhoods has prevented the eviction of almost 150 Massachusetts households by securing reduced mortgage payments that line up with homeowners’ real incomes — rather than with the value set by a real estate bubble that burst long ago.
Our formula is straightforward. We negotiate with the lender’s representative to buy foreclosed homes at current, distressed market values — often 50% less than the amount paid by the homeowner. We then resell the homes to their current occupants with a new 30-year mortgage at a fixed interest rate of 6.375% (a rate that, although higher than the best loans available to people with excellent credit, is far lower than the rate that the high-risk clients we assist could get elsewhere — if they could get other loans at all).
We qualify our clients by closely analyzing their finances and employment situations. We work with local nonprofits to understand client histories. Even after accounting for reserves, emergency repairs and closing expenses, we are able to lower monthly housing expenses and the overall cost of a home loan to affordable levels. On average, homeowners pay about 40% less per month.
We require homeowners to share any future potential appreciation with our neighborhood nonprofit if the market rebounds, discouraging speculators and people who aren’t serious about keeping their homes from coming to us.
Our initiative cannot solve every foreclosure problem. Some would-be participants don’t have enough income to sustain even a sharply reduced mortgage payment. Some in the mortgage industry, citing moral hazard, refuse to sell us homes at their current values because we plan to keep foreclosed homeowners in the homes. At times, we have been outbid for a home we were trying to save, but we won’t spend more on a home if that would mean we would have to offer our borrowers new mortgages that were still too high for them to manage.
Our Stabilizing Urban Neighborhoods initiative is not a bailout or a charity. It is a sustainable model that can offer relief to a substantial percentage of homeowners in foreclosure and relieve mortgage industry gridlock. The Open Society Foundations and others have provided us planning funds to explore other locations across the country where our model might work. The approach is best suited to areas that have suffered substantial depreciation in housing prices, that have high levels of foreclosures, and that have trusted, long-standing community organizations interested in entering partnerships to administer the program. We estimate that our approach could help 1 in 5 homeowners whose homes have significantly dropped in market price, and who are either late in paying their mortgages or in foreclosure.
Renegotiating realistic mortgages that keep people in their homes helps homeowners and neighborhoods. It also helps the mortgage industry, which must come to grips with the fact that many of its borrowers can’t afford to continue to make payments on mortgages that were entered into during the bubble. Our strategy could work on a far grander scale — the kind of scale that, say, Bank of America, Citigroup, HSBC or Wells Fargo or others could adopt.
Foreclosure and eviction are lengthy and expensive. As more homes become owned by lenders, those institutions will bear increasing responsibility for paying local property taxes, insurance and maintenance costs, as well as steep fines if they fail to comply with local building codes and city ordinances.
The groundless fear that helping some borrowers will lead to an avalanche of new foreclosures has discouraged sensible and systemic solutions to the foreclosure crisis. Allowing the mortgage industry to hide behind this fiction has created a genuine hazard — to neighborhoods, to communities and to the nation’s economic health.
Elyse Cherry is chief executive officer of Boston Community Capital.
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