Published August 20, 2009
With the media spotlight focused on health care, it's easy to forget that, for the first time in their lifetimes, baby boomers are facing another kind of epidemic -- one that is equally threatening to their existence and the security of their families. Like the health crisis, the battle is waged at the highest levels of government and corporate power, and stands as a testament to the all-to-human faults of greed and the apparent indifference of those in a position to resolve the crisis.
For many citizens, a perfect storm of high unemployment, falling home values, and aggressive bank foreclosures is rapidly destroying the American dream of homeownership and financial security, and the government's approach to aiding its citizens is terribly disconnected from the reality millions of homeowners are facing: the loss of their homes.
A home of one's own -- as a symbol of financial and personal security -- is the cornerstone of the American Dream. But over the past decade, with the government's blessing, lenders lured striving Americans into high-risk loans built on the smoke-and -mirror promises of an ever-expanding economy. These homeowners realized when they signed their loan documents that they were making a promise to pay, and no matter how corporate executives try to spin it, this epidemic of default is not happening because of bad habits, drinking, gambling, or spendthrift lives. The fact is that the current housing crisis is the inevitable outcome of a corrupt system of lending. The American people were sold a bill of goods based on fraud. Now, adding insult to injury, they are forced to stand by helplessly as the government forgives the sinner and corporate arrogance destroys their lives.
Am I surprised the government is so utterly divorced from the needs of those it serves? Not really. I'm quite sure President Obama, Treasury Secretary Geithner, or White House economic adviser Larry Summers have never spent hour after degrading hour on a lender's 800-number help line, pleading with a faceless operator half the world away for help in keeping their home. Desperate homeowners face both abuse and indifference as the executives directly responsible for putting them in this situation accept handouts, bonuses, and ultimately accolades for "averting a crisis." My message to those at the top echoes the voices of millions of desperate homeowners: This crisis is nowhere near over!
We must begin by breaking the cycle of abuse that average hardworking people must endure as they struggle to hold on to their homes. The humiliating tales people share with me are not the sad tales of a minority group of individuals too irresponsible to maintain home ownership. They are the shared experience of a nation. There were over 3 million home foreclosures in 2008, up a whopping 81% from the previous year. In the first 6 months of 2009, one in 84 homeowners faced foreclosure. And for desperate mortgage holders, there's no end in sight, because in the next two years, 2.5 to 3 million adjustable rate mortgages (ARMs) will turn over, triggering higher payments for millions of people already struggling with shrinking incomes.
In 29 years of practice, I have never heard so many hardship stories or had so many requests from people so desperate to save their homes that they are willing to trade off the financial strain of paying legal fees in order to keep a roof over their heads. These people are solid middle class people who are seriously struggling. They are good people, hard working people, people who have had a cut in pay, a cut in hours, or faced a medical crisis. They are current on their house payments, but know they won't be able to maintain their payments in the future.
Programs with Madison Ave-worthy monikers -- Hope Now, the Mortgage Rescue Bill -- tempted homeowners drowning in debt to believe that help was on the way. The government moved to shore up the banks, promising that banks with liquidity would work to shore up the housing market, and in turn, help the individuals most at risk. But these all proved to be false promises as lenders steadfastly refused regulatory oversight, returning TARP (Troubled Asset Relief Program) funds once they had replenished their cash-poor balance sheets. And so even as money flows from the government to the banks and from bank to bank, the numbers of people losing homes to foreclosure continues to swell. The government's top-down approach has disconnected the means -- a stabilizing bailout -- from the end -- the security of citizens in their own homes.
Homeowners have been victimized, suckered into the high-pressure sales pitches of lenders promoting ARMs. Three years ago, when the economy was booming, the notion of financing a home by paying interest only, and holding on to more of one's hard-earned cash was sold by the banks as the only smart way to manage one's money. "Don't worry about the ballooning payments; those are years away," consumers were told. "You'll probably want to refinance before then anyway; your home's value will just continue to increase." But home equity has not increased. Many homeowners now live in a primary residence valued at 50% less than its 2006 worth.en these people come to me asking for help, they feel they're out of choices. I'm their last stop before they walk away from their homes, choosing to become homeless because they have been broken by the system. They have spent hours on the phone, connected by an 800 number to a "loan counselor" located in a call center on the other side of the world who has no understanding of their personal situation and no interest in any solution other than collecting the monies due to the bank.
All these folks need is a chance to catch up and keep up by making lower payments on a principal amount that accurately reflects the current value of their home in this economy. Sounds simple, but as the lenders are operating now, such a scenario will never happen. I'm outraged on behalf of these honest people caught in a web of bad circumstances. And until things change, I can offer them little hope. All I can tell them is that they basically have five choices:
1. Stop payment on their mortgage, lose their home and ruin their credit for the next 7 to 10 years, negatively impacting their ability to buy another home in the near future;
2. Claim bankruptcy, potentially with the same effects, particularly if there is a second mortgage on the home;
3. Petition their bank for a loan modification, which still will hurt their credit as they must fall 90 days behind in payments for a bank to even consider the request;
4. Ask their bank to consider a short sale; that is, see if the bank will accept payment of the current appraised value of the home from a new buyer and forgive the balance of the outstanding mortgage debt. Of course, this request will also take up to 90 days to process, so again, the homeowner's future creditworthiness is put at risk.
5. Attempt a "short refinancing" wherein, provided with a FICO score of 620 or above, they are able to secure an FHA loan which can then be presented to the mortgage holder along with a request to refinance the property at the current appraised value.
I offer these solutions to the people who come to me to try to save their homes. But I know the reality is that lenders are unlikely to work with them on any kind of principal reduction and payment reduction. The only way to get a lender to work with a homeowner in trouble is for that person to default on their loan, lose their credit rating, their pride, and their sanity.
But these lenders don't care about someone's personal life. These large institutions couldn't be more disconnected from the homeowners they claim to serve. The truth is, institutional lenders are focused on serving their shareholders, not their customers. The shareholders, more than clients, even more than the government, wield the financial power in this equation. Why else would banks be so quick to hand back government funding? TARP funding allowed banks the space they needed to carry inventory and deteriorated loan assets on their balance sheets for another year. For the next two years, they'll have a balance sheet that looks just fine in the annual report. But they're only pushing off the inevitable and few people are daring to point out the obvious.
And what is the inevitable? It takes lenders approximately a year, and costs about $60,000, to foreclose on a property. The lender then has an inventory with a potential resale value. But who, exactly, is going to buy up that inventory -- no matter how reduced the price? Certainly not the displaced homeowners who have had their credit destroyed by bankruptcy and/or foreclosure. In fact, it's likely they'll be worse off than they were before the foreclosure. Economists have found that income losses for workers who are let go in a recession can persist for as long as two decades, and some people never recover their old annual earnings.
It's clear to me that the top-down approach of government focusing on shoring up the financial institutions hasn't served the needs of any of the people I deal with daily. So what do I suggest? I say that the abuse of homeowners must stop. I say that the American Dream must be respected. I say that the government must serve from the bottom up. I urge our leaders to focus on the millions of people who are really hurting in this crisis -- to take initiative to restore pride, hope, and a sense of security to the citizens they serve. Rather than emergency bailouts for the banks, how about some emergency aid for cash-strapped homeowners? Congress should enact legislation that freezes a homeowner's credit score during any period of foreclosure, refinancing negotiation, or short-selling, allowing people to try to save their houses without decimating their future credit scores.
As for the lenders, I propose two simple, practical steps that could start millions of homeowners on the road to a real recovery: a lender should be required to respond to remodification request within 30 days in hardship conditions and good faith loan remodifications must offer principal reduction -- not just a reduced interest rate, or reduced payment for 5 years. The banks will not lose any more money by taking less from homeowners than they would by paying for the legalities of foreclosing, and the expenses of repairing, maintaining and reselling properties that have depreciated significantly.
If we sound the alarm now and demand change that will ease the symptoms and support the financial health of those most truly at risk, we can begin to save the patient. When the "foreclosure epidemic" of the early 21st century is analyzed by future generations, it is my hope that the history reads " -- and millions of people in grave danger of losing their homes were saved by the swift and decisive actions of their government."