As many of you may know, Maryland recently gained $40 million for foreclosure assistance as part of the Emergency Homeowner Loan Program, signed into law several months ago by President Obama. Governor O’Malley used these funds to kick off the Emergency Mortgage Assistance Program last week. On her popular Real Estate Wonk blog, Jamie Smith Hopkins succinctly describes the program’s bullet points:
Borrowers could receive as much as $50,000 in interest-free loans to pay off past-due amounts and to make up to two years of payments. They must have taken an income hit of at least 15 percent, be three to 12 months behind on their mortgage and have a “reasonable likelihood” of being able to get back on their feet.
The emergency help is like loan-to-grant money given to first-time homebuyers: No payments are due for five years, and every year the total is reduced by 20 percent until nothing is owed — as long as the homeowner keeps the property and stays up-to-date on the mortgage during that time.
Ms. Hopkins then asks: “what do you think? Better or worse off than loan modifications?” While perhaps failing to directly proffer a response, my thoughts are below:
Maryland’s adoption of the new Emergency Mortgage Assistance Program is welcome news, no doubt, but it’s important to temper our optimism with strong caution. As it stands, the new program delivers cash, not regulation. And as we’ve seen all too often in our counseling sessions and discerned from our peers across the nation as well as from the news media, cash alone certainly may not result in a tangible step towards mitigating the impact of the foreclosure crisis, which, at least ostensibly, is the goal of this legislation. Take for example Bryan Sheldon’s recent commentary about a “typical” mediation process, in which Bryan, a veteran counselor, accurately describes some of the common troubles that home-owners face while utilizing HAMP: banks’ ridiculous and erroneous demands for documents unrelated to foreclosure, the government’s inability to enforce program guidelines (and the banks’ inability to comply), and the banks’ illegal practice of commencing foreclosure proceedings while the borrower is under review for HAMP assistance. Recently, policymakers were forced to draft legislation prohibiting lenders from initiating a foreclosure while the borrower is actively seeking mediation. While this prospective reform is a breath of fresh air, it should have been totally unnecessary: common sense should prompt one to realize that such a practice is dishonest and unethical.
Frankly, Bryan hits the nail on the button when he writes, “the basic problem with the available government programs is that they have been implemented in the grossly deficient regulatory system which contributed to the foreclosure crisis in the first place.” Indeed, I’m not convinced that this new program will produce results without robust, broad financial regulation to accompany it.
It’s important to remember that the foreclosure crisis was two-fold. The predatory lending scams defined stage one, causing massive foreclosures and therefore families without housing, an aggregate loss of equity across the nation, and oddly as well as most consequentially, a crash in the U.S. securities market. This last consequence led to stage two: large-scale layoffs, which subsequently forced many middle class families to default on their mortgages and eventually face the inevitable.
These victims still exist. Many are still jobless, even homeless. And while many such people borrowed beyond their means, this trend emerged because of the gaping income inequality and stagnant wages that pervaded the last few decades, obligating many middle-class Americans to borrow more than they could take on.
These problems are now structural, and in addition to emergency benefits like the one’s offered in the new package, a structural fix is likewise necessary. To be sure, The administration has made some good efforts: the Frank-Dodd bill aimed at regulating the financial markets, the concept of a Consumer Financial Protection Bureau, headed by Elizabeth Warren, to name a few. But these development aren’t cutting it, indicated by the continuing prevalence of foreclosures nationwide.
I’m worried that the administration will stop with this initiative and that it will turn into another HAMP, which does not grant the Treasury Department the ability to impose fines on banks, a loophole that the latter group routinely abuses, among other shortcomings. Along with foreclosure assistance to states, the President Obama needs to return to the drawing board and draft comprehensive financial regulation that 1) includes consumer protection measures, 2) defines and streamlines the process of responding to a foreclosure, while consolidating paperwork, 3) rigorously regulates the trading and development of dangerous securities, and 4) provides stringent enforcement measures. This last point is crucial, as it had become fairly obvious that the government, all too often, has been plainly unable to administer the rule of law.
Until then, unfortunately, I am not convinced that this measure won’t fall short. So while the state should welcome the Emergency Homeowner Loan Program with open arms, first and foremost, in order to stymie the foreclosure crisis and ensure it does not reoccur, we must mend “the grossly deficient regulatory system” that caused it.