When the government bailed out Bear Stearns in March, plenty of people on Main Street complained it wasn’t fair to save an investment bank and do nothing to help homeowners.
Imagine how they feel now.
Each new step the government takes in the private markets — from seizing Fannie Mae and Freddie Mac to providing an $85-billion taxpayer loan to the insurance company AIG — raises the bar for acting on the foreclosure end of the mortgage crisis, in neighborhoods hit hard by falling house prices and failing loans.
It’s not just about fairness anymore. The intervention on Wall Street creates a huge opening, in the view of housing and community activists, to push for the government to take the lead in the housing crisis on Main Street as well — something it’s avoided so far.
Since March, the government has taken control of three major lending institutions. It could restructure mortgage loans on a large scale and send a signal to the private sector to do the same. It could freeze foreclosures until there’s some sort of plan to help homeowners. It could rescue devastated neighborhoods just like it shored up failing investment banks. It could do far more than the little it has been doing. After all, shouldn’t millions of families facing foreclosure also be considered too big to fail?
“There is a frustration for people outside Washington, who see the Feds moving quickly on saving these big institutions and propping them up, but don’t see much effective intervention in helping people stay in their homes,” said Geoff Smith, vice president of the Woodstock Institute in Chicago, a non-profit research group that focuses on community economic development. “Seizing Fannie Mae and Freddie Mac was an intervention that needed to take place. But what’s also important is stabilizing the homeowners.
“From our perspective,” said Smith, “a strong economy is based on strong communities, from the ground up. We need to keep people in their homes. They make up the foundation of the economy and the mortgage market.”
But they aren’t the ones getting government bailouts. Compare AIG’s $85-billion loan to the amount cities and local governments got in the recent mortgage rescue bill to fix up foreclosed properties — just $4 billion. A study of foreclosure auctions by Smith’s group concluded that amount would barely approach the scale of the problem, even in the Chicago area alone.
“By itself, this money is not going to be enough to make a substantial difference,” Smith said. “There also needs to be an emphasis on developing coordinated strategies for dealing with the impacts of foreclosed and vacant properties, because without them certain neighborhoods have the potential to be lost.”
The government’s biggest attempt to stop foreclosures begins next month. As part of the mortgage rescue bill, the government will begin backing cheaper mortgages for troubled borrowers, with $300 billion in guarantees.
But it’s a voluntary program. Lenders and services have to agree to take a loss on the loans. Yes, the new mortgages will be insured by the Federal Housing Administration. But some lenders might already be on the road to foreclosing on loans and might choose to keep doing so. And there’s nothing the government can do about that.
Even if lenders do take part, there are practical concerns about the FHA’s ability to get the program off the ground, said Patricia McCoy, a banking and securities regulation professor at the University of Connecticut law school. In recent years, the government has downgraded the FHA’s role and shrunk its staff.
“There’s always been a question of how ready the FHA will really be,” McCoy said. “We’re all just hoping for the best.”
For now, the most realistic chance for the government to stop foreclosures may come from its takeover of mortgage giants Fannie Mae and Freddie Mac. The agencies together account for more than half the nation’s mortgages.
In a move to stabilize the housing market, the government seized the two firms earlier this month and placed them under a conservatorship, a rescue that could cost taxpayers millions of dollars. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and other Democrats contend the two companies owe taxpayers something in return, and should freeze foreclosures on some of their loans for 90 days.
But with the government now in charge, it could prod them to do even more, McCoy said. It could force the two to redo millions of mortgage loans, refinancing high-rate mortgages into lower-rate, 30-year-fixed loans. That could make a big difference in keeping people in their homes — though it most likely would be opposed by the lending industry, which would take big losses.
The Federal Deposit Insurance Corp., which took over failed subprime lender IndyMac, is trying to restructure 25,000 of its loans, a move closely watched by the mortgage industry. Lenders and servicers are taking heat for doing too few loan modifications; the industry contends it’s not set up to modify loans on a major scale.
“The federal government is in the driver’s seat right now,” McCoy said. “This is the perfect opportunity for the federal conservator of Fannie Mae and Freddie Mac to say, ‘We’re going to have a serious loan modification plan here. You need to come up with it and implement it.’ If the government can show that it can do intelligent loan modifications, then it can say to other lenders and servicers, ‘You’re wasting money by going to foreclosure. It’s more cost-effective to do loan mods instead.”
But even if the two agencies undertook a massive loan restructuring program, it wouldn’t completely fix the problem. Fannie and Freddie are taking big losses on Alt-A loans, or high-risk loans made to people with decent credit. The two didn’t buy a lot of subprime loans. Lenders and servicers who hold those loans have been reluctant to do loan modifications.
As we reported last week, Hope Now, a private industry-led coalition of housing counselors and servicers organized by the government, hasn’t made much progress in getting those loans restructured into lower-rate mortgages.
In theory, Congress could pass a law requiring servicers and lenders to sell their loans to the government at a loss, McCoy noted. But the chances of that kind of intervention happening are close to nonexistent. The legislation either would never get approved or would end up in litigation for years, she said.
The government may make some bold moves on Wall Street, but it’s not going to go that far in telling the private sector what to do, she said. “Servicers are very, very stubborn,” McCoy explained. “Unless the government owns a company in receivership, all it can do is hold out a carrot.”
That carrot could include freezing all existing foreclosure actions for nine months, to allow industry and the government to redo loans or come up with other solutions to the mess, according to the Center for Responsible Lending, a research group that follows the lending industry. It could encompass allowing bankruptcy judges to modify loans to their fair-market value, to keep people in their homes. Regulators could ban unfair and predatory lending practices. The center, like other groups, is urging Paulson to modify the Fannie and Freddie loans.
Whether the government will do any of this unclear. There are complications to bailing out Main Street, said Adam Levitin, a Georgetown University law professor and credit expert. The first is Main Street’s moral hazard problem — the homeowner who makes his monthly payment resents bailing out the one who didn’t. No one wants to be seen as rewarding the people who bought houses they couldn’t afford in the first place.
That leaves tighter regulation on Wall Street as the trade-off for Main Street paying the costs of the mortgage industry’s excesses, Levitin said. But despite all the tough talk on this, it’s not a given that Wall Street will be reined in once the crisis ends. “Wall Street will start saying, ‘You’re just going to create more risk. You don’t understand the industry,’ just like they always do,” Levitin said.
That same argument worked all through the last decade, as housing advocates repeatedly pressed the Federal Reserve and regulators to curb predatory loans, to no avail. Some have had enough of waiting for the government to do something.
Bruce Marks, chief executive officer of the Neighborhood Assistance Corp. of America, thinks advocates have to get back to old-fashioned, in-your-face tactics to pressure the government and lenders to act. The government’s continuing help this week for Wall Street should be motivation enough, he said.
“We’ve gotten lazy,” he said, of the advocates. “You’re only going to get from government what you’re strong enough to get them to do.”
His group has already begun trying to take on massive loan restructurings in 40 cities. But because of the AIG loan, it’s planning to do more.
In the next two months, Marks said, his group wants to “make life hell” for politicians and the CEOs of lending and servicing companies that don’t do loan workouts. The plan is to “personalize” the battle, he said.
Along with having borrowers show up at every political event held by congressional representatives to question why lawmakers aren’t doing more to stop foreclosures, they will picket the neighborhoods where CEOs live and at their children’s schools. These are tactics the group has used in the past.
Marks, who has referred to himself as a “banking terrorist,” struck agreements with Citigroup, Bank of America, Countrywide and other lenders for his group to modify their loans, after years of similar grass-roots protests. “You have to rewrite the mortgages,” he said. “It’s the only answer.”
Not everyone is taking the same approach. But they acknowledge the frustration that’s out there — especially as the government repeatedly swoops in on Wall Street.
To Smith of Woodstock, the biggest problem is that the government has come up with a patchwork of solutions for foreclosures but no overall plan — and no clear blueprint for using its clout to keep people in their homes and to help neighborhoods.
Unlike the bailouts on Wall Street, a solution could be less about money than it is about ideas, Smith said. It could be about making the difficulties facing homeowners as important as the tumult in the financial markets.
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