Dancing Around the Housing Crisis: A Response to Secretary Shaun Donovan

In this Jan. 5, 2013, photo a "for sale" sign is seen outside a home in Glenview, Ill. Five of the biggest U.S. banks have cu
In this Jan. 5, 2013, photo a "for sale" sign is seen outside a home in Glenview, Ill. Five of the biggest U.S. banks have cut struggling homeowners' mortgage balances by $19 billion, part of a total $45.8 billion in relief provided under a landmark settlement over foreclosure abuses. (AP Photo/Nam Y. Huh)

HUD Secretary Shaun Donovan's recent op-ed in The Huffington Post concerning the National Mortgage Settlement, the $25 billion agreement that the nation's five largest mortgage servicers entered into last February with the federal government and 49 state Attorneys General to save families from unnecessary foreclosure, obscures the fact that very few homeowners are receiving the relief that would keep them in their homes: modification of the terms of their first mortgage.

In response to increasing criticism of the Settlement, Donovan highlighted the over 550,000 homeowners nationwide who have received "relief" under the Settlement. Tellingly, he failed to delineate just what type of relief these homeowners are getting. It's that failure that brings to light what is wrong with the Settlement and makes Donovan's op-ed feel like another dreary number in the financial regulators' songbook.

According to numbers submitted to the Settlement's national monitor, as of Dec. 31, 2012, only 46,575 homeowners nationwide received any relief on their first mortgage. This accounts for a mere 8.5 percent of homeowners that settling banks claim to have assisted pursuant to the Settlement. Instead, the vast majority of homeowners are obtaining relief through short sales (168,707 nationally) or the forgiveness of a second mortgage (164,328 nationally). These two types of relief account for over 60 percent of homeowners "helped" under the Settlement.

There are certainly times when a short sale is beneficial to a homeowner and sometimes it is the only viable option. And it is also true that the forgiveness of a second mortgage will reduce a homeowner's overall debt burden. But neither solves the foreclosure crisis and neither keeps families in their homes without other relief. It is modifications on first mortgage that save homes.

For many homeowners, especially in metropolitan areas like New York City, the monthly second mortgage payment is less than $500, a fraction of the monthly first mortgage payment, which averages between $2,000 to $3,000. Thus a bank's forgiveness of the second mortgage does not free up enough cash to enable a homeowner to start paying her first mortgage. Nor would the bank allow her to do so: Under most mortgage contracts, once a homeowner falls behind, the bank will refuse payments until the homeowner becomes "current" on her mortgage. In other words, the homeowner must pay the full amount of missed payments or risk foreclosure.

Donovan asserts that the Settlement's national monitor will not give the banks credit for second mortgage forgiveness unless it "provide[s] a tangible benefit to a homeowner." That begs the question, how does the national monitor define tangible benefit? Donovan should do what other regulators have not -- demonstrate real leadership and publicly define "tangible benefit" in order to hold the banks accountable to the stated goal of the Settlement.

Other benefits that may accrue when a second mortgage is forgiven -- such as overall debt reduction -- are secondary to the Settlement's goal of keeping homeowners in their homes. Only if the first mortgage is modified should credit be provided for forgiving a second lien.

Donovan's undefined metric of a "tangible benefit" brings to the forefront the second problem with the Settlement: the lack of transparency of who is benefiting from the Settlement. Currently, the effectiveness of the Settlement can only be analyzed by broad numbers provided by the banks on a state-wide basis. Are some areas receiving more benefits than others? What is needed is zip code or census tract data of who is receiving relief under the Settlement. Because predatory lending targeted African-American and Latino neighborhoods, the foreclosure crisis has been more severe in communities of color. It is unclear if these communities are receiving a proportionate share of relief under the Settlement.

Amongst states, the Settlement's benefits are even further obscured by these vague numbers and a lack of accountability. A recent report issued by the Alliance of Californians for Community Empowerment shows that California homeowners are not getting the relief they need. But California is actually doing better than most -- 34.2 percent of homeowners nationwide with first mortgage modifications are in California. Other states with a similarly severe foreclosure problem are not seeing the same amount of benefit. Take for example Florida, which only accounts for 15.5 percent of the homeowners receiving first lien modifications nationally. Or New York which has a mere 4.4 percent of the total homeowners with first mortgage modifications under the Settlement.

Observers give credit to the special side deals won by the State of California, including the appointment of an aggressive state monitor and the requirement that California receive its own, presumably much more detailed, data. Additionally, California's new Homeowner Bill of Rights, which subjects banks to significant financial penalties and provides homeowners with a private right of action, has also likely spurred the banks to better performance in California. Greater transparency, accountability and regulator teeth demonstrate that the banks will provide first lien relief. As HUD Secretary, Donovan could ensure that all states see these benefits.

Donovan must continue to monitor the progress of the Settlement with its goal in mind: to save families' homes from unnecessary foreclosure. With so few first lien modifications reported by the banks, it is clear that goal is not being achieved. At this juncture, shifting the goal of the Settlement from saving homes to some undefined "tangible benefit" will only benefit the banks, consign struggling families to foreclosure and, yet again, leave the American public watching another tired song-and-dance regulatory routine in Washington comprised of showcase hearings followed by more ineffective regulation. Donovan knows better and can do better.