Two ways to respond to the foreclosure crisis
Let's discuss two different policy designs for how to fight the worst parts of the ongoing foreclosure crisis, one successful and one not. We'll then discuss a great new report from the National Community Reinvestment Coalition that details many of the best local and state policy responses to the foreclosure crisis.
The first comes from Los Angeles. Foreclosures are lose-lose-lose situations. They hurt lenders, borrowers and communities. The community losses are devastating; there are the well-documented spillover effects, where foreclosures drive down value of neighboring properties, forcing more properties deeper underwater, depressing economic activity. They also destroy municipality budgets. As an Urban Institute study, "The Impacts of Foreclosures on Families and Communities: A Primer" (May 2009), found, the costs can be high:
At $20,000 a pop, three vacant, unsecured and abandoned properties is the same as a teacher's salary. And that's even before we get to crime and the "broken-window" style disorder that waves of abandoned properties generate in a community. (If you haven't read it again recently or seen it at all, it may be a good time to re-read Alex Kotlowitz's New York Times magazine feature "All Boarded Up," a look at these foreclosure problems for Cleveland written in March of 2009. It could only have gotten worse.)
Given the high economic and social costs, the Los Angeles City Council, led by community activists including Alliance of Californians for
Community Empowerment and others, as well as city workers who are members of SEIU Local 721 and L.A. Council member Richard Alarcon, did the sensible economic thing: They proposed a tax on abandoned and unkempt properties.
The details: "L.A.’s City Council recently passed a 'foreclosure registry' ordinance, requiring lenders to maintain foreclosed properties or be fined $1,000 per day, up to $100,000 a year. Lenders will have 30 days to fix problems before fines set in."
What a sensible and elegant policy solution. This encourages banks to find suitable negotiations with homeowners to keep people in their homes. It has a serious stick to require banks to actually obey the law when it comes to the destruction of blight in neighborhood.
It works because everyone is well-incentivized to do their jobs; the city will collect money, which it loves to do, if the banks don't comply. Citizens have a means to report blight, which they want to do to keep their neighborhoods well functioning and safe. In fact, cool online innovations like SEIU's "Hoodwinked LA" Web page, which allows citizens to track foreclosed properties to report to city officials, have been created to empower people. And banks will avoid destroying neighborhoods out of neglect lest they pay a tax, which they had no incentive to do previously. The thing practically runs itself.
Compare that to the Home Affordability Modification Program (HAMP). Here Obama's Treasury team took a system that had a terrible design and doubled-down on it. Servicers aren't modifying mortgages. There's an active empirical debate we'll cover next week over whether or not servicers are not modifying mortgages because of information problems or becomes of adverse incentive structure -- or if you don't speak economics, whether or not the servicers are dumb or corrupt. What was meant to be a passive, thin, pass-through vehicle with obvious conflicts of interest now has to actively manage a giant portfolio of troubled mortgages. And they are either unwilling or incapable of acting as a fiduciary for investors and getting mortgages back to being current and working.
What does HAMP do? It gives a lot of money to servicers to nudge them into being slightly nicer with their modifications. It takes the worse features of the current system and hopes that it'll work with some money greasing it. Unlike the L.A. Tax, this approach does not line up anyone's interests. The servicers are turning down the money; less than 2 percent of HAMP's budget has been spent, and modifications aren't hitting any kind of the numbers they were designed to hit.
And instead of empowering people, it leaves them entirely at the mercy of a mortgage monitoring system that was already falling apart before the crisis, leaving homeowners worse off than they were before they started. And it leaves bankruptcy judges twiddling their thumbs and government officials nothing to do but come up with excuses for why the program isn't as bad as it looks.
States as the next battlegrounds
As people look back at the first two years of the Obama administration, the "liquidate the homeowners" approach of bleeding out foreclosures, protecting bondholders/too-big-to-fail banks and propping up housing prices will probably be remembered as an across-the-board mistake, politically and economically. But the exploding foreclosure fraud crisis and the move by state attorneys general to investigate gives a new opening to push for state- and municipality-based efforts. Some reform-minded state attorneys general survived the elections, some lost. But the battle continues on.
With that in mind, the National Community Reinvestment Coalition released a report, “Rebuilding Communities in Economic Distress: Local Strategies to Sustain Homeownership, Reclaim Vacant Properties, and Promote Community-Based Employment,” (pdf) outlining many of the success stories at the local level from the past several years that community organizers, activists and others have had in fighting the foreclosure crisis. It covers the Los Angeles efforts at vacant property registration ordinances and taxes to force upkeep mentioned above, the Slum Abatement and Blight Enforcement Response (SABER) Team of Tucson Arizon, a cross-departmental coordination of enforcement and prosecution of slum and blight laws, receivership programs in Baltimore, Maryland, and many, many others.
I was just thinking the other day that I didn't have a resource that compiled many of the local-level policy innovations that are trying to fight the worst parts of the foreclosure crisis, and then someone showed me this report. One would like to see a Democratic administration that backs these local and state efforts in a constructive way now that Congress will shut down -- will we see it?
| November 5, 2010; 10:00 AM ET
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