No less an expert than Joseph Stiglitz, Nobel Prize-winning economist and president-elect of the International Economic Association, has concluded that that there is a real answer to the foreclosure crisis: Principal reduction. Forcing banks to write down the principal of troubled loans is, as Stiglitz told the Sacramento Bee, the "best option for the country... For banks, it means coming to terms with reality, with the fact that they lent money on the basis of prices that were inflated by a bubble. It ends the fiction that they will get repaid the full amount lent."
The band-aids that have been tried thus far just aren't working.
Susan and Robert Gerke, profiled by the San Francisco Chronicle on Thanksgiving Day, know that too well. They thought they had survived a combination of health crises and a recession-induced drop in income and would manage to keep their home. They worked with their bank to set up a loan modification under the government-sponsored Home Affordable Modification Program (HAMP), made 11 trial payments, stayed in touch with the bank and generally did all that was asked of them.
But this fall the Gerkes were notified that their home is scheduled for foreclosure Dec. 29. They were denied a permanent modification because, unlike many troubled borrowers, they actually have some equity in the house.
Prompted by the Chronicle's inquiries, the lender is reviewing the situation and may relent. But the Gerkes' plight underlines the utter failure of the voluntary HAMP program to help families battered by unforeseen circumstances -- most of whom aren't lucky enough to get a major newspaper interested in their plight -- stay in their homes. A burst of publicity may help an occasional family but doesn't change the overarching problem: At every step of the process, the benefit of the doubt goes to the lender or loan servicer, not the borrower struggling to keep a roof over his or her head.
We have to do better -- and quickly.
HAMP's failure was outlined by Neil Barofsky, inspector general overseeing the government's bank bailout, in congressional testimony last April. He explained that "the home foreclosure crisis has not abated; indeed, the situation has continued to deteriorate since HAMP's rollout."
Often, he testified, HAMP actually leaves struggling borrowers worse off, as they "end up unnecessarily depleting their dwindling savings in an ultimately futile attempt to obtain the sustainable relief promised by the program guidelines." Not only do they often get the rug pulled out from under them after months of struggle, they commonly face devastating back payments and penalties that suddenly become due.
As I noted last week, a massive tide of foreclosures is coming -- foreclosures that will have devastating effects not just on the millions of families that will lose their homes, but on entire neighborhoods and ultimately our whole economy. It's time to admit that HAMP hasn't worked and start providing real relief to struggling families.
Disclosures this fall of massive irregularities in foreclosure documents -- often casting doubt on who has the legal right to foreclose on delinquent mortgages -- led The Greenlining Institute and others to call for a complete moratorium on foreclosures. With foreclosures halted, there would be time to sort out the mess; more importantly, the pause would make it possible to put in place a program of real relief based on principal reduction. But pretty much the entire Washington establishment has resisted, including key Obama administration officials.
Without principal reduction, we'll see millions more foreclosures. And, contrary to the bizarre arguments put forth by Treasury Secretary Tim Geithner and others, that won't stabilize communities, it will destroy them.
In many cases, the present situation pushes borrowers to walk away from their homes in what's called a "strategic default." If you owe $250,000 on a house that's now worth $150,000, making those inflated payments may make no sense, despite the hit on your credit rating a foreclosure would cause. Homeowners who might tough it out if they felt economically secure have little reason to do so if they have to choose between making those inflated mortgage payments and feeding their kids.
This is crazy. It helps no one for homeowners, often caught in the middle of circumstances they couldn't foresee or control, to do all the suffering and carry all the burden. Tell Secretary Geithner and the White House that we can't wait any longer, that it's time for a foreclosure moratorium and principal reduction program now. The Treasury comment line is 202-622-2970, then press #1 and leave a message; the White House comment line is 202-456-1111, and you get to get to talk to a live operator.