Nov. 4, 2010 at 9:00 AM ET
George Bush, Barack Obama, Democratic wave, Republican tsunami. It doesn't matter who’s in charge -- one problem has, so far, transcended them all: all those empty houses.
The fragile U.S. economy will not recover until someone solves the issue of empty houses and their drag on everyone’s financial stability. Right now, things aren't looking good. There may still be 10 million or so more foreclosures in the pipeline, on top of the 3 million from 2009 and another 3 million expected this year. There already are 19 million vacant homes in America, according to the U.S. Census Bureau. Nothing would more quickly kill a fledgling recovery and further decimate everyone’s home values than dumping another 10 million empty homes on the market.
Here's the problem: While the Obama plan to help at risk homeowners has been a disastrous mess, Republicans say they want to do even less.
The empty house problem impacts us all. Each foreclosure drains $4,000 in equity from neighboring homes, according to some estimates. Empty neighborhoods create blight; empty houses kill the new home construction industry. And even if you aren't among the 10 million homeowners at risk of foreclosure -- that's one in five outstanding mortgages in the country -- odds are good that you are a responsible mortgage payer whose home is now “under water.”
In California, 35 percent of homeowners are in that plight, owing more than their house is worth. In Florida and Arizona, half of all homeowners are drowning, and in Harry Reid's Nevada, fully 70 percent are under water. Homeowners with negative equity are in serious financial handcuffs. They often can't move to take a new job, because they can't afford to sell their homes. They can't borrow to help with other debt or to fix up their homes. And they feel terrible, which puts them on the sidelines for any recovery that might be triggered by consumer spending.
When it comes to empty houses, we are all in this together. So why are we doing so little about it? And why would we even consider doing even less?
Even the most blindly loyal Obama supporters have to be disappointed with the president's feeble attempts to help homeowners at risk of foreclosure. After 18 months, the Home Affordable Modification Program (HAMP) has fallen about 90 percent short of its stated goal. We were told it offered hope to 3 million or 4 million people. Instead, fewer than 500,000 homeowners have new, permanently lower mortgage payments. Meanwhile, more than that have been kicked out of the program, having been drawn in by the prospect of lower mortgage payments, then later denied for non qualification, failure to make payments, or a host of other reasons. Worst yet, since the advent of HAMP, some 3 million people have been kicked out of their homes.
Instead of hope, most HAMP participations found Kafkaesque frustration. The litany of nightmares has been well-chronicled: lost paperwork, random denials, stall tactics, empty promises. Homeowners following bank instructions and making payments as instructed still received foreclosure notices. People who spent their last dollars making temporarily modified mortgage payments – instead of using that money for rent and to start a new life -- were kicked out of their homes anyway.
So nearing the end of 2010, the back of the baseball card on HAMP looks like this: Banks repossessed homes at a rate of 100,000 per month, while HAMP was helping 14,000 per month. That's not helping.
'Cruel,' and 'false hope'
These tepid -- in some cases, counterproductive -- efforts to address the foreclosure problem are the single biggest failure of Obama's first two years in office, in my view. But don't take my word for it: Here's how the TARP inspector general described the program in an audit released last week:
"What Treasury deems a universal benefit, homeowners call 'cruel' and offering ‘false hope,’” it said. The report accused the Treasury Department of trying to "define failure as success." The report accuses Treasury of disregarding the "harm and suffering" the program has caused, and ignoring cases where participants "unnecessarily (deplete) dwindling savings in an ultimately futile effort” to obtain relief.
Naturally, Republicans have seized on the program’s failure. As recently as last week, Rep. Darrel Issa, R-Calif., called for pulling the plug on HAMP. Issa's words have serious weight: He will likely lead the House Oversight and Government Reform panel next year, giving him the power to launch an investigation of HAMP.
In a letter sent to Treasury in July, Issa argued forcefully for HAMP's demise.
"The massive government intervention is simply not working," he wrote. "HAMP is reaching only a tiny fraction of those homeowners whom the program was designed to help. … The evidence points to only one conclusion: The program should end immediately."
Hapless HOPE NOW
What does Issa say should replace it? Private efforts at modification. In fact, Issa said that HAMP "disrupted" modifications that banks would have completed on their own had the government not gotten in the way.
Let me summarize these two approaches to fixing the empty house problem: Dumb and dumber.
If you've watched television after 11 p.m. in America during the last two years, you know all you need to know about private home loan modification, thanks to nonstop late-night infomercials. You might not remember that the old "leave it up to the private sector" plan has already been tried.
Back in 2007, the Bush administration attempted a voluntary modification program called the HOPE NOW Alliance, run by banks. HOPE NOW essentially provided a toll-free hotline to help consumers contact their banks and plead for mercy. HOPE NOW still exists, and the alliance still puts out press releases saying it's helped hundreds of thousands of at-risk homeowners. Does anyone believe it's done enough? Your eyes, and all those “for sale” signs, should tell you otherwise.
It's hard to see how removing the government's assistance program could make things better. And Republicans can't directly kill the program, because they only control one body of Congress. The money for HAMP comes from the already-appropriated TARP/bailout funds. An aggressive investigation into HAMP's failures could, however, make things very uncomfortable for the administration.
'Best thing we've got
But many advocates for foreclosure assistance programs say they think Republican calls to torch government housing help are probably just saber-rattling.
"We've got a huge foreclosure crisis, and so far nothing we've done has turned the tide. But HAMP is the best thing we've got," said Alys Cohen, of the National Consumer Law Center. She said the program's biggest problem is that banks aren't complying with its rules, and no one is punishing them for that.
The Treasury Department also has failed to set benchmarks for success, she said. "It needs to be fixed, not scrapped,” Cohen said of HAMP. “... It would be a shame if people scrapped the problem and replaced it with nothing else to help 10 million people who need it."
Ira Rheingold, a public interest attorney with the National Association of Consumer Advocates, called HAMP "extremely disappointing," and said the program wasn't well designed. But he, too, said the program should be fixed instead of scuttled.
"There are a number of homeowners who can be helped, but I fear they will say this is a failure, let's shut this down," he said. "The GOP will wind up blaming the government, as opposed to going after the banks. They will figure out a way to protect banks from their own incompetence."
The empty house problem is vexing because it is not monolithic. One side might think the problem was created homeowners who overreached and deserve to lose their homes; the other side counters that corrupt banks tricked families into booby-trapped loans. In fact, the housing mess is all those things, and more. Lenders who used illegal tactics like “robosigning” foreclosure documents and greedy speculators who bought condos in South Florida hoping to flip them for profit also contributed to the mess. Ideally, Cohen said, someone would invent a "trick-o-meter" to figure out which homeowners deserved help, and which deserved market punishment.
"But no one has a trick-o-meter," she said.
The problem, said Rheingold, is that decisions on loan modification have been left to banks in every program designed so far.
"There has to be a recognition that you cannot let the loan servicers be the ultimate decision-makers here,” he said. “Right now people are wrongly denied all the time. We have to create a due process. "If there is anything we should have learned so far, it's that if we build anything where we are trusting the banks, we are idiots.That's a recipe for failure. Depending on banks to do the right thing instead of mandating they do the right thing is a recipe for failure."
One controversial element of due process might be allowing bankruptcy judges to perform so-called "cramdowns," which reduce the principal balance on home loans. Right now, there is no legal process for reducing outstanding balances. Banks have strongly opposed the idea, saying it would forever change the nature of home mortgage lending.
But less radical measures also could help, Rheingold said. Centrist Republican Sen. Olympia Snowe, R-Maine, proposed earlier this year a measure that would have created an Office of the Homeowner Advocate within the Treasury Department that would help consumers work their way through housing rescue plans. Such an advocate is sorely needed, Rheingold said, and Snowe’s support for the measures shows there is at least some Republican support for creative solutions.
And he said a new Housing and Urban Development test program designed to help unemployed homeowners facing foreclosure shows promise. The program provides bridge loans and other aid for up to 24 months while homeowners search for work.
'What are we doing to save communities?'
Still, the empty house problem is mammoth. If 10 million families lose their homes, that would represent roughly $2 trillion in home value, and roughly $1.8 trillion in outstanding mortgage balances. No matter how you do it, that's a huge hole in the economy to fill.
Cohen said homeowner advocatesaren't attached to Obama's HAMP program as the solution to that problem; they are chiefly worried that an ill-advised attempt to dismantle it and turn the problem over to market forces could be a final crushing blow to the housing market.
“The real question isn't HAMP. HAMP is a red herring," she said. "We have a foreclosure crisis. What are we going to do to help these people, save communities and save the economy? That's really the issue, not 'Does HAMP work or not?' When the history books are written about our time I hope the narrative won't be that both parties sided with the banks."