Dear Mom, Here’s What Crashed the Economy (Part I)

Re-posted from my guest blog on Rooflines.  

My Mom Rocks!

My mom rocks.  She’s the most big-hearted, intellectually curious, bright-eyed and good-looking mom in the world.  Now, she and Pop came for a visit a few weeks back and Mom pulled out of her purse a couple of news clippings:  Five Good Reasons Why Wall Street Breeds Protesters (USA Today), and Wall Street’s Gullible Occupiers (Wall Street Journal).  She laid them down in front of me over a lovely brunch (at Kevin’s in Red Hook for you foodies out there) and asked in that demure Dayton, Ohio drawl of hers:  which one should I believe?

Mom deserves an answer! 

So, I’m going to give it my best shot.  There are an awful lot of folks who have killed an awful lot of trees trying to sort this business out (and I will cite throughout this blog my personal favorites), and much black ink has been spilled.  I’m going to try and give to you, in layman’s terms, what I believe the critical issues were and some ideas on how to address the current aftermath and future implications thereof.  This may take a while.  Ready? Continue reading

401(no)(k): Why Retirements Should Not Be Used to Pay Mortgages

The Century Reader: Foreclosure Home for $1.00?

For those of you who are not avid readers of the Detroit News, there was a really well done opinion piece on a new proposal put forward by U.S. Sen. Johnny Isakson, R-Ga., and U.S. Rep. Tom Graves, R-Ga.  The writer for the Detroit News, Brian O’Connor succinctly lays out the proposal as follows:

Right now, if you’re strapped you can take a loan against your 401(k) through your workplace. You have to pay it back within five years with interest, but you’re paying it to yourself. About 85 percent of plans offer loans.

If you’re desperate, 89 percent of plans offer hardship withdrawals. Even though you don’t have to pay the money back, it’s a pretty bad deal: You have to pay income tax on the amount withdrawn and a 10 percent penalty if you’re younger than 59-1/2. For most people, it means at least 25 percent of the money withdrawn goes to penalties and taxes, not to saving a home from the bank.

But here’s where the plan backed by Isakson and Graves fails to the point of uselessness: It allows for outright withdrawals, not loans, but it only waives the 10 percent penalty — you’re still on the hook for taxes, ranging from 15 percent on up to the top bracket of 35 percent.

The plan also limits your withdrawal to a maximum of $50,000 or half of your account balance. So, if you withdrew $50,000 and were in the 25 percent tax bracket, you’d skip a $5,000 penalty but still pay $12,500 in federal tax, plus your state income tax. And unlike taking out a loan, all that money would be due April 15, and it would all go to the tax collector.

O’Connor goes on to point out that 401(k) funds are protected in bankruptcy, which is a point I want to highlight.  Why?  Because if you decide to declare a personal bankruptcy as a way to restart your economic life (which probably means you will lose your home), at least you can hold on to that nest egg in your retirement fund.  That can’t be tapped in bankruptcy to satisfy your creditors.

I’ve already written in a prior blog about my experiences of foreclosure prevention in NYC:  most homeowners are all too willing to run up their credit cards, poach the kid’s college savings fund, dip into their 401(k) and borrow from Aunt Tilly before they give up the home.  This frequently leaves homeowners in a very precarious financial position, and (even worse) frequently does very little to address the underlying economic difficulties in their lives (usually loss of income).  I think it’s just plain bad policy to provide further encouragement to distressed homeowners to act so clearly against their own self interests – especially when lenders and servicers have failed to similarly extend themselves and meet distressed homeowners halfway with timely, accurate and equitable workout solutions.

Personal as Political 

And here’s what really kills me about this proposal:  this solution essentially advocates that homeowners (AKA taxpayers, AKA workers, AKA consumers, AKA citizens) again make a substantial and unprecedented personal sacrifice in an effort to pay back a lender (AKA bank, AKA institution, AKA federal bailout recipient) for a home that is distressed, when that same lender (and the bank that controls it) have frequently failed to provide adequate servicing and support to the homeowner.  This presumed “systemic” response (which as O’Connor notes would really provide very little value over a traditional early 401(k) withdrawal for most people) again puts the burden of attempting to resolve the foreclosure crisis on distressed individuals, and apparently does nothing to address either the problematic history of the mortgage bubble (and all the very messy ways that home mortgages were improperly extended, packaged and securitized), nor the myriad current problems within the mortgage servicing industry (such as problematic denials, improper foreclosure proceedings, and the lack of an effective appeals process).

It just really gets my Irish up.  And I can’t help but point out that the maximum 401(k) withdrawal amount of $50,000 is the exact same amount that many distressed homeowners should have qualified for under the recent Emergency Homeowners’ Loan Program.  In other words, the federal program which suffered from such enormous administrative ponderousness that it only disbursed $432 million of the $1 billion allocated for distressed homeowners should now be replaced by a meager incentive to allow those same distressed homeowners to sack their own retirement savings funds.

That is not really what I would call an effective systemic solution.

For now, let’s hope that the proposal by Isakson and Graves gets all the attention it rightfully deserves. We can do better.

Big Foreclosures vs. Little Foreclosures

Foreclosures Leave Apartment Buildings in Need of Repair

There was a really nice article in today’s Gotham Gazette about larger, non-owner-occupied buildings that are headed into default and foreclosure.  The author, Chris Opfer, does a good job of laying out the complications for tenants, who are frequently stuck when a building enters the netherworld of default.  With affordable housing really hard to find for low income renters (refer to my earlier post “Foreclosure: The Ugly Stepchild of Affordable Housing“), trying to relocate from a rent stabilized unit can be a real nightmare.

Big vs. Little – What’s the Difference

Tenants Turn to Lenders to Repair Buildings

So, just let me clarify that we’re talking about two very different kinds of housing stock.  Many properties with six or more units of housing are rent stabilized (for a very handy FAQ, click here).  In most cases, the owner does not actually live in the building, but is instead an investor who has purchased the property with the ambition of making a profit from it.  Property investors make profits in two ways:  by keeping expenses (mortgage payments, building repairs, maintenance, vacant units, etc.) lower than income (rents), or by selling a building for more than they paid for it.  During the bubble, many investors were more interested in the latter strategy than the former.  While property values were going up, up, up, this wasn’t so much of a problem, because you could sell your overpriced building to the next sucker who got incredibly cheap and easy financing.  But when the music stopped, someone got stuck with a building that they couldn’t sell, and that no longer made enough money in rents to pay for those expenses (especially that really high mortgage).

The city is still struggling to come to terms with the number of larger, rent stabilized properties in this condition.  Really excellent work has been done on this by University Neighborhood Housing Program through its Building Indicator Project.   If you want to geek out on some seriously juicy NYC based research, it’s well worth a read.  Oh, and it will scare the crap out of you:

“Currently, the BIP database tracks violation, lien and lender data for more than 62,000 properties in four boroughs of New York City, and the most recent data shows nearly 3,400 properties containing approximately 135,000 apartments scoring above our likely distress threshold of 800 points.  This represents 5.5% of all properties in the database, and is a significant increase from the fall of 2009 when 3.3% were likely distressed. The percent of properties also increased slightly in all boroughs except Manhattan since the spring of 2010, bucking the trend of scores dropping slightly each fall.”

I should also take a moment to acknowledge the equally compelling work done by the Citizens Housing and Planning Council on Zombie Mortgages – carefully detailing the costs and risks of the over-leveraged, multi-family properties.  Suffice it to say that there appear to be many larger, rent-stabilized properties at risk of foreclosure because of investor speculation in NYC.

Lucky Break: Foreclosed Home Returned to Owner

This is a very different problem than the issue of 1-4 family home foreclosures that is plaguing the country.  These properties are owner-occupied, and while the homeowners are in many cases also over-leveraged, there are other contributing problems (primarily loss of income and unemployment) that are causing widespread mortgage defaults.

From the perspective of reducing foreclosure-related displacement in big vs. little buildings, the critical difference in my experience is that in large buildings tenants are more likely to remain even if the building is foreclosed upon, but in small buildings tenants are almost always removed upon foreclosure.  Indeed, protections for tenants in larger buildings are much stronger and deeper than for tenants in smaller buildings.

There is another important difference that’s also worth mentioning:  in most little building foreclosures the owner / investor actually lives in the home.  Why is this such a critical difference?  Because when the owner lives in the property they have a real incentive to maintain the security and livability of the building as best they can.  That means a lot to their tenants, as you can imagine, and substantially reduces the likelihood that they will feel compelled to move because of deteriorating building quality.

Speeding Up vs. Slowing Down

So, here’s the real policy issue – in large scale properties when there is a mortgage delinquency it’s better to speed up the foreclosure proceeding.  In smaller, owner-occupied properties, it’s better to slow it down.  The reason is fairly straightforward:  with larger, non-owner-occupied buildings, getting to a resolution that includes a restructuring of the debt (usually through foreclosure) means the building can have a shot at a fresh financial start.  Many of these buildings would be fine if they weren’t saddled with unrealistic debt.  They have good paying tenants, are currently in reasonable repair, and meet an important need in the housing market.

On smaller, owner-occupied units, slowing down the process to allow homeowners more opportunities to correct their situation preserves options for both owners and tenants.  Because tenants in these properties are routinely evicted upon foreclosure, it’s better to try and correct the mortgage default through modification, refinance, repayment of arrears, or other similar strategies.

Note that both of these strategies are aimed at keeping tenants in place and reducing the overall number of folks who will be put out of their homes as a result of mortgage delinquency.

I should conclude by noting, for those of you who might want to know, that free help for tenants and homeowners is available in NYC by simply calling 311 and saying the word “foreclosure.”  

Why I Think Schneiderman is Right

NYS Attorney General Eric Schneiderman

So, the press keeps coming back to this story about the proposed “robo-signing” settlement being constructed by a consortium of state Attorneys General.  Initially, the consortium included AGs from all 50 states, making it a very powerful platform for pursuing a settlement concerning malfeasance on the part of many banks in processing large numbers of foreclosure claims.

NY State Attorney General Eric Schneiderman, along with the AG’s from Minnesota and Delaware (among others), are deeply concerned that any settlement on this issue providing a waiver to banks against any further liability on “robo-signing” will ultimately have the impact of watering down future investigations and settlement negotiations.  Indeed, Schneiderman feels so strongly on this issue that he’s spoken out in a NY Times editorial against a proposed settlement being floated, and has become persona non grata with other AG’s directly involved in the negotiations, not to mention HUD Secretary Shaun Donovan (speaking on behalf of the administration).  Their response has been to kick Schneiderman off the central settlement negotiating team and generally cut him out of the process.

Iowa State Attorney General Tom Miller

Iowa AG Tom Miller has defended these actions by saying that it’s better to reach a settlement sooner and to get their collective hands on a proposed $20 billion payout by banks, than to wait and prolong an already cumbersome investigation.  He also says he would insure there are limitations to any waiver of further liability in the proposed settlement, and that these would allow for further substantive investigations.  These are arguments that have merit, but I remain distressed.

So, let me begin my comments by saying that Schneiderman is following a well established tradition of NYS AG’s going after purported and actual Wall Street abuses.  Both Cuomo and Spitzer developed their political muscle in high profile fisticuffs with financial industry executives, and burnished their populist credentials at the same time.  I don’t really have much interest in questioning Schneiderman’s motives for deciding to take a stand on this issue – high stakes as it is.  Bear in mind that he’s essentially removed himself from the adult table on these negotiations, which could be very lucrative for distressed homeowners, foreclosure prevention advocates, and NY State in general.

What I really want to say about this issue comes out of my direct experience working with banking regulators and federal agencies around the issue of bank malfeasance.

From 2008 until this past July I ran the Center for NYC Neighborhoods, the country’s largest centralized foreclosure prevention effort.  We worked with nearly 5,000 NYC homeowners each year, and we saw a lot of things.  We were literally reviewing thousands of mortgage documents and naturally what we saw concerned us.  When the robo-signing scandal broke, I can’t say that we were particularly surprised.  At the time, we were approached by both federal and state banking regulators asking about our observations and any recommendations we had.

We knew that there were many issues within mortgage processing – not just late in the process when foreclosure affidavits were filed (the issue the robo-signing scandal pertains to), but throughout the long chain of the transaction from mortgage origination, through securitization, to modification negotiation.  We made it simple:  go out and subpoena a random sample of mortgage documentation from origination and review it for errors, omissions and malfeasance.  You would find consistent problems, including:

  • Misrepresentations of personal income and assets, loan amounts, title clearance, appraisal values and other critical information in mortgage origination documents;
  • Improper recording and transference of promissory notes through complex securitization processes;
  • Poor documentation of current and overdue payment amounts, records of indebtedness, and delinquency levels among defaulted homeowners;
  • Improper and sometimes fraudulent modification agreements that in a wide variety of cases left the homeowner paying more than their current debt;
  • Numerous instances of inappropriate fee billing and bundling;
  • Unnecessary and sometimes illegal add-on private mortgage insurance or omissions in property tax escrows.

Frankly, this is a short list – we found lots of other consisten problems as well.  We basically said, go back to the beginning and think about how a mortgage should be handled according to current law, and then just see how many instances there are where this didn’t happen.  In an industry that was operating at the peak of the bubble, under lax regulatory oversight, we guarantee you will find systemic and systematic abuses that warrant further investigation.

We posed this question, and I was told by several of my colleagues that it was taken to the highest levels of federal regulatory leadership for consideration.  The answer eventually came back that such an investigation would not be conducted.  Why?  Because regulators were very concerned about turning over those rocks.

I mean, in a way, I can’t say that I blame them.  If such an investigation were made, I’m sure what it would have revealed is that the mortgage origination and securitization industry was a mess, and that the products it developed and sold were in many instances, um, soiled.  Now, think of the trillions of dollars in securitized mortgage debt out there that’s already worth no more than pennies on the dollar.  Next, think of telling the investors who are losing their shirts, well, you may be right that you were sold a bill of goods.  You can bet that the ensuing bloodbath of lawsuits, forced redemptions, buybacks and write-downs would turn the moribund financial sector into little more than a knacker’s shop.  That’s a pretty scary thing to contemplate.

At the same time, when I look out at the landscape of current housing policy in regards to the foreclosure crisis, I am very critical of how little is being done to defend affected homeowners and how little accountability has been expected of financial sector partners.

But here’s the thing that really upsets me more than anything else.  When the robo-signing scandal broke, one of my regulatory colleagues whispered in my ear that “the feds” were really hopeful that the AG’s could force banks to the negotiating table in ways that they could not.  Meaning that federal regulators had lost faith in their own abilities to compel banks to enact such things as principal write-downs, more effective loan servicing platforms, and greater transparency in modification appeals (among many other issues).  In short, the feds were hoping the state AG’s could do what they felt they themselves could not.

It’s sadly ironic to me that Schneiderman is taking a stand in the current negotiations to say, we can’t walk away from the true scale of this problem.  It deserves complete investigation and proper accountability because it’s at the center of a global economic crisis.  And yet, it’s the feds who are pushing for a weaker settlement and therefore effectively limiting all future investigations.

I’m glad I voted for you, AG Schneiderman.  I hope you are successful not because I want to see “justice” in some deeper sense, but because I think exposing the underbelly of this debacle is vital to our nation’s ability to move beyond it – economically, politically, even morally.

Best of luck.  It looks like you’re going to need it.

Why Foreclosure Buybacks Are (not) Wrong

Why Foreclosure Buybacks Are (not) Wrong

I happened upon this posting yesterday and I while I try to maintain a position of anti-snarky-ness, I found it very difficult to find any common ground with the perspective that foreclosure buybacks are wrong.

Allow me to explain.

Things are so really ugly out there right now in foreclosure land that some homeowners in Detroit are resorting to an usual strategy:  they appear to be going into default and allowing the bank to foreclose, then purchasing the property back at the foreclosure auction on the courthouse steps (frequently through a family member or similar sympathetic confederate).

The author cites the following:

The Detroit News reports that in the past year “about 200 of nearly 3,700 Detroit properties sold at auction last year that appeared to be bought back by owners, some under the names of relatives or different companies and many for $500. The total in taxes and other debts wiped away was about $1.8 million.”

I should note that the author appears to be a mortgage broker who is no doubt losing possible commissions the to so-called “buyback artists” he discusses in his article.  No doubt he would prefer they all do short sales (ugh).  We’ll leave aside the author’s obvious self-interest for the time being.  Let’s also leave aside the following:

  • That the banks clearly are dying to unload these properties if they are actually selling them for $500 a pop (they’ve essentially written these properties off as worthless);
  • That if they aren’t sold at auction they go into the bank’s REO portfolio where they would likely rot, causing all kinds of mischief for the bank, the neighbors and the city of Detroit; and
  • That if these properties are going to sell, they are going to be bought by somebody – so why not the former owner who actually has a personal stake in the well-being of the property and the community.

Taxes and “other debt” of $1.8 million are being “wiped away” in the auctions, depriving the good citizens of Detroit of much needed municipal revenues.  That is a concern.  While 200 “buybacks” are significant, that’s just over 5% of the total foreclosed housing stock sold at a given auction in Detroit.  Furthermore, according to the very lovely Detroit Drilldown provided by Social Compact, there were a total of 6,259 foreclosures in 2010 (and a total of just under 59,000 since 2005).  We’re talking about 500 properties “bought back” per year, if the ratios hold.

In doing the math, that $1.8 million loss comes out to about $9,000 a property.  Last time I checked, it costs about $10,000 to knock down an abandoned property and turn the foreclosed home into a vacant lot.  Detroit as a city clearly comes out a winner when property owners “buyback” foreclosed properties based on the cost of removal of blighted and abandoned properties alone.

Never Fear, Buybacks Won’t Go Mainstream

I actually think this is a very clever and viable solution for homeowners in unaffordable mortgage products, but it’s a niche solution.  It’s never going to be the solution for the foreclosure crisis.  Why?  Because in order for such a solution to obtain, you need an extremely weak housing market, and very little competition among purchasers.  Markets like this do exist in cities with long-term population decline (like Detroit), but these are the minority of housing markets (despite weak real estate prices across the board), and appear to be fairly limited to “rust belt” cities in the midwest.  And I can say “rust belt” without irony or derision because I was born in Dayton, Ohio.

Sheriff refuses to conduct evictions in Philly.

Furthermore, most homeowners in my experience don’t actually want to risk the credit damage of foreclosure, the trauma and logistical challenges of vacating the home when the sheriff shows up, or the risk of losing the home at auction to another bidder.  While this may be a solution for some, it’s just not going to become the kind of trend the author wants to portend.

They Are All Cheats and Liars

I believe good policy is based on how people think, and not on how people feel.  What the author here is really saying is:  these homeowners are cheating the system.  They are breaking the covenant of the mortgage agreement and taking advantage of weaknesses in the system for their own personal gain.  They are systematically ripping us off, and we deserve to have our rights protected against the likes of these malefactors.

This should sound familiar.  First off, dear reader, I hope it will remind you of claims made about so-called “strategic defaulters” – where underwater mortgage holders were purportedly defaulting on their mortgages, then buying the marked down house a block over and walking away from their initial home.  This did happen, but at nowhere near the scale the punditry might suggest.  In my experience in NYC, I never met a single one of these strategic defaulters.  On the contrary, I met hundreds if not thousands of homeowners who valiantly fought mortgage default by wrecking their 401k’s, poaching the kid’s college savings fund, maxing out the credit cards, and generally robbing Peter to pay Paul.  People, ultimately, really don’t want to lose their homes.

But this should also remind readers that brokers, mortgage originators, banks, servicers, and foreclosure mill attorneys HAVE been systematically taking advantage of the system.  This is not just about “robo-signing,” but also the lack of ability to show standing, poor document handling during modification, and dubious origination practices.  Again, let’s leave aside a whole host of other issues between those who securitized mortgage backed securities or sold credit default swaps against them in their relations with their counterparties.  Those are deep waters and the subject of a soon-to-be-post.

It might be tempting, therefore, to toss “buyback” homeowners and less than scrupulous financial sector actors into the same bucket, or to paint them both with the same black brush.  But I believe there are important differences for “buyback” homeowners:

  • They are not acting out through multiple, serial transactions a pattern of neglect, manipulation or abuse – they are acting instead in (what I would call rational) self-interest on a single transaction that is saving their home;
  • The net outcome of a buyback looks like it’s ultimately of benefit to all parties: banks get rid of a property they don’t want, homeowners get to keep a property they do want, communities avoid an eyesore and keep a neighbor, and cities avoid costly abandoned properties that they then have to deal with at a net loss;
  • Contracts are built to be broken.  That’s why the terms of every contract include elements that dictate what happens when the contract IS broken.  What these homeowners are doing is actually legal.  And intelligent, given their circumstances.   While it’s possible to raise the question of whether such actions should be governed by other terms that make it more difficult or impossible, that is a policy discussion or a matter between contracting parties.  As I hope I make clear above, for public policy purposes buybacks appear to provide a net win for all parties.

So, I don’t buy it that buybacks are wrong.  On the contrary, they appear to me to be a viable solution, if a limited one, and should probably be encouraged by local authorities and advocates where possible.  I would be surprised if we hear a lot more about this issue itself, but it’s as good an opportunity as any to highlight the differences between systematic abuse and practical, strategic revision.