Sylvia Alvarez didn't grasp the enormity of the crisis about to engulf her community until she returned to her office in Tampa, Florida, after a long weekend and found her voicemail filled with messages from distraught homeowners.
It was early 2008. The bottom had fallen out of both the housing market and the local economy, and record numbers of people had begun defaulting on their mortgages. Callers flooded the phone lines to the Housing & Education Alliance, Alvarez’s housing counseling agency -- not realizing the same forces that had wrecked their finances were also threatening to sink the agency they were now turning to for help.
“I was overwhelmed,” Alvarez said recently, recalling the twin challenges of trying to help people save their homes and also keep afloat her nonprofit, which was largely dependent on vanishing support from the mortgage industry. “I remember saying, ‘How in the hell are we going to do this?’”
Seven years later, the Housing & Education Alliance has rebounded remarkably, after subsisting for years on a meager budget. The organization’s survival is a testament to the perseverance of Alvarez and her staff, who worked with little or no pay for years. The foreclosure rate in Tampa is the third highest in the country, but the situation is vastly improved from even two years ago.
But this otherwise feel-good story comes with a distressing coda. After years of working long hours at great personal sacrifice to save other people’s homes, Alvarez is now on the cusp of losing her own.
The specific problem that Alvarez faces is the same one that's vexed hundreds of her clients -- and many of her own staff -- over the years: She is underwater on her mortgage, meaning she owes substantially more on her home than it is worth.
More than three years ago, with government prodding, the mortgage industry began offering some homeowners in this situation a form of assistance known as principal reduction. Big banks like JPMorgan Chase and Bank of America, under multibillion-dollar legal settlements with the Justice Department and other federal and state agencies, could claim credit by writing off some of the debt owed by people like Alvarez.
Debt forgiveness can yield benefits to everyone involved. The homeowner is no longer tempted to walk away, leaving a home to decay and lose more value. And the person, or family, isn’t subjected to the financial and emotional trauma of losing a home.
On paper, Alvarez would seem a perfect candidate. She fell into default in 2008, after her income as executive director of the Housing & Education Alliance plummeted to $17,000 from $73,000 the year before, according to forms the nonprofit filed with the IRS.
After years of reduced income and struggling to make ends meet -- "I ate a lot of Cheerios and Special K," she says -- Alvarez finally saw her salary rebound this year to its pre-crash level. And because of all the missed payments and accumulated fees and interest, Alvarez and her husband now owe $419,000 -- over $100,000 more than the couple thinks the house is worth.
But Alvarez, like the majority of the 5 million or so borrowers who are underwater on their mortgages, is not eligible for principal reduction. That’s because her loan, like millions of others, is controlled by Fannie Mae, the mortgage giant that was put into conservatorship by the U.S. government after an epic bailout in 2008. Despite its status as a quasi-government entity, and despite supposed pressure from senior members of the Obama administration, Fannie Mae doesn't permit debt forgiveness on its mortgages.
For years, administration officials blamed this on a career bureaucrat who'd ascended to the top of the Federal Housing Finance Agency, the group created to oversee Fannie and its cousin company, Freddie Mac. That official, Edward DeMarco, vigorously opposed principal forgiveness, arguing that offering such relief would pose a “moral hazard.” Writing off some people's debt, he said, would likely encourage other people to stop paying their mortgages in order to take advantage of the same opportunity.
There was an economic rationale as well, DeMarco argued. Under the conditions of the bailout, Fannie and Freddie are essentially required to turn over all their profits to the government -- and supposedly, forgiving homeowner debt could mean eating into those profits. (As of this spring, the two groups have paid back roughly $40 billion more than they received during the bailout.)
DeMarco, who was then the acting director of the FHFA, hewed to this reasoning even after his own agency produced research showing that offering targeted principal reduction could actually save the companies money. He continued to make this argument even as housing activists protested in front of his own home.
In late 2013, the Senate confirmed former Rep. Mel Watt (D-N.C.) to replace DeMarco, fueling hopes that the housing companies would quickly reverse their position. But Watt hasn't appeared any more receptive to debt forgiveness than his predecessor, and with the foreclosure crisis receding into the distance, the Obama administration has not seemed inclined to press the issue.
Through a spokesperson, Watt declined an interview request from The Huffington Post. Instead, an FHFA spokeswoman forwarded snippets of Watt’s comments on the subject to Congress. In one exchange from December, Watt sparred with Sen. Elizabeth Warren (D-Mass.), a vocal proponent of principal reduction.
"It has been six years since Congress created FHFA and in all that time your agency has never, not once permitted a family to reduce its principal mortgage through Fannie or Freddie," Warren said.
Warren cited a Congressional Budget Office report from 2013 that determined a modest principal reduction plan could help 1.2 million borrowers and save Fannie and Freddie -- and by extension taxpayers -- $2.8 billion.
In response, Watt said he was looking for a "win-win" situation in which "responsible" borrowers might get assistance.
"We're still studying the issue," he told a House committee in January.
Kevin Stein is an associate director of the California Reinvestment Coalition, a group that has advocated for broad-based principal reduction. Stein said he is frustrated with Watt's responses, but hasn't given up hope. "Maybe the time to end the studies and make a decision is now," he said.
In recent months, Alvarez has sought to offload her home through a short sale, in which Fannie would accept less than the amount owed on the mortgage and agree to release Alvarez from her financial obligation. Earlier this week, though, Fannie Mae rejected an offer from a prospective buyer that would have priced the house at about $253,000, according to Alvarez.
Alvarez said she isn’t sure what to do next.
"We have no sense of security," she said. “Now I know exactly what our clients have gone though."