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Want to fight foreclosures? Reduce principal debt

detroitnews.com | November 7, 2014

By Steve Babson

When Mel Watt was nominated less than a year ago as director of the Federal Housing Finance Agency (FHFA), many housing activists expected him to initiate new polices at Fannie Mae and Freddie Mac that would prevent unnecessary foreclosures and protect neighborhoods still recovering from the housing bust of 2008.

As a congressman, Watt had called on the agency he now heads to help hard-pressed families by reducing mortgage principal on "underwater" loans where the value of the home had fallen below the balance owed. Since Fannie and Freddie, the failed mortgage giants taken over by the federal government, own nearly two-thirds of all residential mortgages in the U.S., loan modifications with principal reduction would benefit millions of struggling homeowners victimized by the mortgage-banking fraud of the "bubble" economy.

Watt often changes the subject by talking about Detroit, as he did in early October when he came to the city to tout a home refinancing program and the Detroit "Neighborhood Stabilization Initiative" (NSI). Launched in July, the NSI is a pilot program for policies that will, according to Watt, "stabilize neighborhoods hardest hit by the housing crisis." With the Detroit NSI slated for future expansion to other needy communities, who needs principal reduction?

The Detroit NSI is, in fact, little more than window dressing for Watt's inaction on policy changes needed in Detroit and nationwide.

Consider the NSI's meager offerings. The program's "enhanced" My City Modifications will only reduce interest rates and lengthen the loan term up to 40 years for those who qualify. A lower interest rate is always welcome, but if it's still applied to a grossly inflated loan balance over 40 years, many struggling homeowners will give up on such a "take-it-to-the-grave" mortgage and walk away. The FHFA refuses to disclose the final eligibility criteria that Fannie and Freddie will apply to these "mystery modifications," and leaves implementation of the program to the same sub-contractors — bank servicers — who have already paid tens of billions in penalties for fraud against homeowners and the FHFA itself.

There was talk of an additional NSI program that would transfer some "distressed" loans to the National Community Stabilization Trust (a private non-profit) when the house is worth less than $25,000; the Stabilization Trust would then own the note and could reduce mortgage principal to keep the family in the home. However, even this small-scale token of principal reduction — originally slated for implementation in September — has now been postponed until some unspecified time in 2015.

When he joined other members of Congress calling for principal reduction, Watt and his colleagues cited studies by the Treasury Department and the FHFA that principal reduction on underwater mortgages would save taxpayers $1 billion: The amount forgiven on the inflated loan balance would be more than recovered by the greater likelihood that hard-pressed homeowners would continue paying if they had some equity in the house.

That's still true for the estimated 42 percent of Detroit homeowners who remain underwater. A recent report, "Underwater America: How the So-Called Housing 'Recovery' is Bypassing Many American Communities," released by the Haas Institute at the University of California, Berkeley, showed that in many communities there has been no recovery, especially among people of color in urban neighborhoods targeted by predatory lending.

Since the economics of principal reduction are long settled, the issue now is political: Mel Watt's inaction on principal reduction finds support among the more politically aggressive players in the finance industry and the tea party, whose members heartily condemn what they describe as handouts to the undeserving.

For those of us who live and work in hard-hit communities, principal reduction is better understood as damage control and a partial payback to the millions who have suffered through a crisis forced on them by the Wall Street players whose predatory and reckless behavior crashed the economy.

Steve Babson is retired from Wayne State University and is currently active in Detroit Eviction Defense.

 

Back to November 2014 Archive

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