While Unemployment Improves, Many Citizens Remain Unable to Meet Basic Needs

Source: New York Times

Commentators around the country have been touting last month’s uplifting unemployment statistics, which indicate, ever so subtly, that the nation’s job situation may be improving.  While many large businesses have remained profitable throughout the recession, it now appears that the private sector is willing to invest in new hiring, suggesting an increased demand for goods and services.

As the Obama administration enjoys temporary praise, a new study, highlighted a few days back in the New York Times, presents a gloomier picture.  The study demonstrates that the greater job creation we’re experiencing may be much less rosier that we think, because many of the country’s newly created jobs do not offer a living wage.

The study was commissioned by the non-profit, Wider Opportunities for Women, which authoritatively titled their report, “The Basic Economic Security Tables for the United States.”  In order to arrive at their disconcerting findings, the study’s researchers had to determine what constitutes a living wage.  Thus, the many tables presented by the study premise themselves on the following notion:

“Families, the media and policymakers often focus their attention on volatile, rising expenses, such as food and fuel. While such expenses are important in day-to-day life, they are small parts of families’ much larger economic security challenges. Expenses such as housing, transportation and child care receive less attention, but are much larger pieces of the economic security puzzle, and can be greatly influenced by policy.”

Here, the authors put forth a rather bold contention, as they turn on its head the paradigmatic metric utilized by economists to measure adequate wages, the Consumer Price Index, which considers some of the former, more “traditional” tables—food and fuel—to a much greater extent.   Perhaps equally innovative, the authors further posit that “Not all families require homeownership…[though] such savings can contribute to long-term and intergenerational economic security, however, when investments are careful and savers plan for the long term.” By deflating the value of homeownership while making sure to mention it’s virtues, the authors, in a sense, take a swipe at a bipartisan generation of policymakers that abetted the crisis.

Substantively speaking, I’d guess that to many, the study’s results are equally eye-opening.  The Times reports that “a single worker needs an income of $30,012 a year,” while a “a single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability.”  My cursory research indicates that this figure exceeds the median family income in the Unites States.

The study’s econometrics are advances, no doubt, but they convey a truth that many other commentators—from the activist Barbara Ehrenreich to the former Labor Secretary Robert Reich—have articulated for far too long (and that policymakers have, in turn, stubbornly ignored): that wages have not kept up with inflation over the last several decades, forcing far too many Americans to borrow more than they can afford to.  So while pundits and the administration alike hail the new job data, make sure to consider the human aspect behind these statistics, which certainly may not be as peachy.

Mediation Nightmares

U.S. Treasury Secretary Timothy Geithner, speaking about the Home Affordable Modification Program

A few days back, on her popular Real Estate Wonk blog, Baltimore Sun housing commentator Jamie Smith Hopkins provides an excerpt from a letter, written by Baltimore resident Michael F. Malloy, that describes a frustrating mortgage mediation experience.  Molloy posits that “nothing has changed,” as banks continue to take advantage of home owners with predatory loan products and exorbitant fees.  Here, one of our Foreclosure Prevention Counselors, Bryan Sheldon, has put forth a response to Mr. Molloy’s letter. –Harsha Sekar

Michael F. Molloy’s letter does a fine job of illustrating issues faced by homeowners who are in default or who are struggling to make their mortgage payments.  It’s not that there aren’t programs available to assist most homeowners.  The problem is that servicers and investors have no real need to follow program guidelines or assist borrowers in default.  The primary program available to the average homeowner is the Home Affordable Modification Program, or “HAMP.”

Assuming that the letter writer’s relative is still employed, requested assistance in a timely manner, and has a mortgage serviced by a company who is participating in HAMP, the mediation session probably shouldn’t have even occurred.  Even though the Home Affordable Modification Program has helped over 600,000 Americans receive permanent modifications to their mortgages, many more may have been helped if mortgage servicers did not routinely and blatantly ignore HAMP guidelines.  For one thing, no foreclosure action is supposed to be commenced while a borrower is in review for HAMP or alternative assistance.

If someone is in the process of applying for a modification and their servicer asks for a document that seems irrelevant or ridiculous, it probably is.  Bank of America routinely asks for utility bills.  Wells Fargo requires borrowers to submit a separate hardship letter and financial worksheet, despite the fact that both are included on the required Request for Modification and Affidavit (RMA).  Chase asks borrowers to provide a written statement that they do not have to pay Homeowner’s Association fees.  This is despite the fact that the borrower must list any Homeowner’s Association fees that they may have on the RMA or risk perjury.  Mortgage servicers have institutionalized dilatory and onerous documentation requirements despite the fact they directly contradict HAMP guidelines.

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.  Fannie Mae is the HAMP program administrator, and Freddie Mac is the compliance officer.  Mortgage servicers can “shop around” between other regulatory bodies such as the Office of Thrift Supervision and the Office of the Comptroller of the Currency, and the tangled web of oversight authority produces an environment in which no one really has the capability to reign in a still largely out of control industry.

Mortgage servicers are businesses like any other.  The bottom line is their primary concern, and it often does cost servicers more money to modify mortgages than to foreclose, write off their losses, and see if they’ll be sued by investors or the government later.  The regulatory system needs to be overhauled so that mortgage servicers face substantial risk if they refuse to comply with program guidelines.  Until the financial incentive to modify a non-performing mortgage into a successful transaction for both the consumer and the servicer is greater than the servicer’s incentive to foreclose and cut its losses, I believe we will continue to hear stories similar to this one.

To see a copy of the regulations that mortgage servicers are supposed to be following, click here.

Bryan Sheldon
Foreclosure Prevention Counselor
St. Ambrose Housing Aid Center, Inc.
Baltimore, MD

Will Proposed Reforms in Lending Work?

New Yorker Cartoon Satirizing Wall Street’s Opaque Securitization Chain

Over the last few weeks, considerable reforms have been proposed in the world of mortgage financing.  The most salient has been Iowa Attorney General Tom Miller’s proposal that would, among other things, require banks to terminate foreclosure proceedings while borrowers are actively pursuing a modification.  While Miller’s ideas seem both necessary and commonsensical on the surface, they have run into criticism from all ends of the political and economic spectrum.  The critics, from various vantage points, ultimately posit the same inquiry: will the reforms work?

On one hand, critics from the left argue that the reforms do not go far enough. In a staff editorial a few days back, the New York Times vigorously puts forth this contention, expressing concern that the terms of the reform will provide the banks leeway to avoid the kinds of strong penalties they deserve.  In particular, the Times cites the fact that the proposal does not proffer a way to implement reforms.  Moreover, Miller and his fellow attorneys generals have discussed the possibility of a settlement over the banks illegal practices, like the infamous robo-signing scams and systemic predatory lending—which may function as a prosecutorial shield.

The Times’ also cites a review of the proposal by their staff writer, Gretchen Morgenson.  In addition to outlining the overhaul’s lack of sufficient legal remedies for borrowers, Morgenson also points out what in her estimation appears to be yet another substantive flaw:

the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.

Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.

To some degree, the document presented by Mr. Miller raises more questions than it answers.

As news of the proposal’s substance continues to rapidly unravel, a few thoughts come to mind.  While the proposal is a much needed step in the right direction, it does not seem to address the institutional nature of predatory lending.  We now know that the aggressive marketing of bad loans to uninformed consumers morphed into a systemic problem largely as a result of a perverse incentive structure.  As we’ve outlined in many previous posts, main street banks often possessed an incentive to dole out non-prime loans because of a pervasive securitization chain that linked borrowers, lenders, investment banks, and investors.

While consumer protection reforms are needed, no doubt, attorneys general would fundamentally benefit from a regulatory infrastructure at the federal level that addresses the securities market.  The Frank-Dodd Bill is a start, but as John Cassidy recently pointed out in his much talked about New Yorker article a few months back, asset-backed securities have become the heart of the financial industry, implicating average Joes and Wall Street investors alike.  Without financial regulation that adequately integrates consumer protection measures, Miller and the rest of the state’s attorneys will not gain the legal leverage they need to stymie the broken lending processes that have afflicted far too many of their constituents and thus may be forced to make concessions.

Talk to St. Ambrose Review of Charles Ferguson and Audrey Marrs’s Inside Job

The Film’s Official Poster

Two weeks ago, nearly 38 million Americans tuned in to watch ABC’s coverage of the eighty-third annual Academy Awards ceremony.  While this year’s Oscars delivered the usual Hollywood dose of glitz and glamour, this post highlights merely one slice of the 2011 Oscars: the award-winner for Best Documentary Feature, Inside Job, directed by Charles Ferguson and Audrey Marrs.

Inside Job is relevant to St. Ambrose because it focuses on the origins and implications of the financial crisis, which, of course, are extensively tied to the housing and real estate markets.  Moreover, low and middle-income people have taken a particularly hard hit, as many have lost substantial equity in their homes—and by extension savings for college tuition, healthcare, and retirement—or have undergone foreclosure.

The film, however, doesn’t focus too heavily on everyday folks but instead provides a thorough, didactic chronicle of the public policy and irresponsible financial practices that led to the crisis.  Divided into five parts, Ferguson and Marrs begin their documentary by portraying the situation in Iceland, which, staggeringly, possessed a yearly GDP of $13 billion but found itself $100 billion in debt during the crisis.  Iceland’s troubles culminated in the sort of brutal unemployment with which we in the rest of the Western world are now familiar.  The filmmakers attribute this flabbergasting statistic to the fact that Iceland, in addition to privatizing it’s three largest banks, systematically unraveled its robust regulatory state, as it too was swept by the deregulation fervor that infected most other industrialized nations.  This allowed Icelandic banks to make highly leveraged investments—as in using more borrowed than in-hand capital—that, of course, failed miserably.

From this vantage point, the film explores how domestic deregulatory policy also facilitated U.S. bankers’ identical mistakes. Ferguson and Marrs graphically convey two of the most talked-about yet enigmatic securities that were apparently responsible for bringing down the economy, Synthetic Collateralized Debt Obligations and Credit Default Swaps.  The former refers to the process of banks’ securitizing bundled mortgages, repackaging them and selling them to investors at an inflated price.  The pervasiveness of these kinds of securities created a perverse incentive structure whereby local lenders were under pressure to sell as many loans as possible, even “junk” ones, since they knew that these loans would be purchased, regardless of their quality.  This then led to massive predatory lending.  The latter kind of “security,” if one can even call it that, are the notorious insurance policies that enabled investors to make bets on whether the borrower would sink or swim, get foreclosed or pay off the loan.

In addition to demonstrating the proliferation of both securities, the film, I think, works to dispel a few equally pervasive myths: these securities are complex, sophisticated products that the average Joe couldn’t possibly comprehend, and that the high fallutin’ investment bankers on Wall Street had everyone’s best interest in mind. On the contrary, Ferguson and Marrs show that CDOs and Credit Default Swaps amount to little more than the repackaging of other people’s debt, and rather than rigorously examining the loans that comprise their products, these bankers possessed a lazy tendency to put them on the market with little analysis.  (The directors contrast the financial services industry with the IT sector, for which one actually “needs an education”). They further point out that the perverse incentive structure extended to our three major credit rating agencies, which, having been commissioned by the banks themselves, systematically bestowed upon the banks’ junk loans the same AAA ratings that they gave U.S. Treasury bills.

What the film does best is cohesively weave together this unfortunate maelstrom of events, illustrating the ties between borrowers, lenders, banks, and their investors in a cogent and clear fashion that is lacking in the media.  The filmmakers expose how these ties emphatically reveal a truth recently reiterated by the Financial Crisis Inquiry Commission’s Report, that the catastrophe was avoidable.  To be sure, Inside Job has some setbacks: the directors could have done a better job conveying the human affect of the bankers’ practices.  They could have also further developed some important themes that they mentioned briefly, like the rising cost of college tuition relative to the rate of inflation, which is functioning to preclude more and more middle class kids from college.  Nevertheless, in an hour and twenty minutes, Inside Job manages to be informative, entertaining, and important, and we at Talk to St. Ambrose would welcome any thoughts or comments about the film.

Attorneys General Present Demands for Overhaul of Foreclosure Processes

Elizabeth Warren, Head of the New Consumer Financial Protection Bureau, Which will Administer Overhaul of Foreclosure Processes (Image Source: New York Times)

As a follow up to our last post about the state of New York’s new proposal to provide counsel to all residents undergoing foreclosure, today, we present another innovative new proposal that could further bolster the position of homeowners during this critical time.  The New York Times recently reported that many state attorneys generals have presented a list of demands calling for new regulation that would prohibit banks from beginning the foreclosure process while the borrower is simultaneously working out a mortgage modification.

The term “mortgage modification” appears to be one of art.  Since the article is unclear, I suppose this could include anything from taking out a second mortgage to pay for college tuition or a healthcare expense to proactively seeking a large-scale overhaul intended to stave off foreclosure.  In either case, it seems unfair, on its face, for banks to initiate foreclosures while a modification is actively underway, as this not only stymies the modification process but also creates confusion about the bank’s ultimate aim—to foreclose or to work with the borrower?

The demands take place in a highly politicized context, as housing advocates continue to express dismay over the “robo-signing” scandals, where, in an attempt to ensure that the foreclosure process was moving forward without delays, lawyers and other banks signed thousands of documents without thoroughly reviewing them, leading to embarrassing mistakes.

The demands also mark an expansion of power for the government’s newly created Consumer Financial Protection Bureau (which would administer the changes), headed by prominent Harvard law professor and securities industry expert, Elizabeth Warren.  While Warren is yet to gain any kind of (usually requisite) congressional confirmation, she has already received notoriety, as banks regard her as a tough, no-nonsense regulator eager to re-stack the cards against them.  The government, along with consumers, has expressed considerable confidence in her ability to be a strictly enforce the law and therefore provide a divergence from the past.  This package, with Warren as its public image, has backing from the Departments of Treasury, Justice, HUD, and the Federal Trade Commission.

While the proposal marks a shift from ongoing practices, the economic effects are unclear.  Banks argue that the package serves as a merely a “band-aid,” since in the long term, many of these borrowers cannot afford their homes, period.  Moreover, the package may enable many of the more than 2 million delinquent properties to reenter the market, which would further depress home values and, by extension, private wealth and equity.

From our perspective, while the foreclosure crisis has resulted in economic pain for many, our low-income clients have shouldered perhaps the greatest burden.  In addition to the broad economic effects, our clients have had to face the human consequences of having to move out of their homes and onto the streets. Delaying foreclosure proceedings would provide many of our clients  the possibility of turning over their homes to the market and making a capital gain, perhaps even  retaining some equity.  Furthermore, it would provide a means for low-income citizens to wait out the recession until the job market revives and affordable housing becomes a palpable reality.

Innovative, New Public Policies that Work to Protect Homeowners

Map of Foreclosures in Baltimore, 2006-2007 (Source: NPR)

For low and middle-income Americans, the last few weeks have been gloomy, especially given that more states have jumped onto the anti-collective bargaining bandwagon initiated by Governor Scott Walker of Wisconsin, whose vision may preclude many from gaining access to affordable housing.  Amidst this climate, the foreclosure crisis continues to ravage communities, as thousands of vacant properties remain in Baltimore alone.

Here, however, we present two potentially innovative new policy proposals that have surfaced in recent weeks, both of which could indeed encourage access to affordable housing.  The first is the New York’s proposal to provide an attorney to each of the state’s 80,000 foreclosure victims.  While the right of a criminal defendant to retain a lawyer has remained an integral part of the American legal fabric for decades, The Empire State’s idea would (perhaps) mark the first time in history where defendants in civil matters can gain access to counsel, free of charge.

Interestingly, this idea didn’t originate from the state’s legislature; rather, New York’s Chief Judge, Jonathan Lippman, was behind the proposal.  To back up this idea, legally speaking, Judge Lippman cited the landmark 1963 Supreme Court decision, Gideon v. Wainwright, which held that states are obligated to provide counsel to all criminal defendants.  Lippman said that this was the right moment to extend this provision, reasoning that “today it is an equally obvious truth that people in civil cases dealing with the necessities of life can’t get a fair day in court without a lawyer.”

The proposal makes sense for a number of reasons.  For one, as the Times points out, because of the recent revelations that several of the country’s most prominent banks had used “improper” methods to accelerate the foreclosure process, the court have increasingly become a the pivotal battle field for the fight between victims and banks.  Access to counsel, even if it’s minimal, could make a tremendous difference for foreclosed families, as “simply responding to a foreclosure notice in court” could delay the process for months.  Furthermore, the idea would certainly enhance courtroom efficiency, as lawyers would be able to both advocate and settle on behalf of clients, making sure that cases move through the courts during this overburdened time.

The Times doesn’t mention the more far-reaching effects of this proposal.  By keeping families in their homes—potentially for years after the initial notice of foreclosure—they continue to pay their utilities bills, maintain their yards, make necessary fix-ups, and so forth.  This would increase property values throughout neighborhoods, delivering more wealth and spending power to nearby families, which would help strengthen the economy.  The idea, in this sense, serves to bolster the work of Max Rameau and Take Back the Land, the subject of our last post.  It would also facilitate Mayor Rawlings-Blake’s strategy “Code Enforcement” strategy to curtail blight, which was mentioned at the city’s recent Vacants to Values Summit.  (And by the way, it would also, I suppose, help alleviate the crumbling legal industry).

The idea is expensive: Judge Lippman has asked the legislature for (an additional) $100 million that could be distributed to legal aid groups and other non-profits, and in a political climate obsessed with savings, his request is no sure bet.  However, given the severe economic effects of letting vacant homes stand—something Baltimore, over the last several decades, has had to learn the hard way—that money should be perceived as an investment with the potential for enormous returns.

It should be noted that Maryland has already taken an important step in the right direction: Last Summer, Governor O’Malley signed the a promising foreclosure mediation bill, giving Maryland families the right to undergo mediation with lenders before they face eviction.  Hopefully, Maryland will follow in the footsteps of New York, by taking the additional measure of ensuring legal services.

Here at St. Ambrose, we take pride in the fact that we retain a skilled and dedicated group of legal services professionals, who have help countless Baltimore families stave off foreclosure and retain their homes.  I hope that other members of the judiciary, as well as legislators around the country, will follow Judge Lippman’s lead and adopt the notion that adequate housing is a “necessity of life,” and that indigent foreclosure victims deserve representation.

On Thursday, I will discuss the new mortgage modification demands sought by states attorneys general.

Take Back the Land: A Human Rights Approach to Housing

Image Source: Take Back the Land

This week, we take a divergence from the dense, policy-based reporting of the last several posts to focus on a small, little known social movement, the Take Back the Land Movement.  Take Back the Land, an intentionally designed social movement that emerged via the work of diligent community organizers, possesses one central theme: to elevate the issue of Housing as a Human Right.

On it’s face, it’s easy to conflate the Miami-based organization with the countless other housing non-profits throughout the country, whose work is often challenged by bureaucracy and whose funding is likewise handcuffed by strictly regulated government grants.  But Take Back the Land is different.  It’s a grass roots movement that advocates on behalf of the homeless, with the goal of housing longtime homeless individuals and families as well as folks who’ve been displaced during the foreclosure crisis.  And unlike the stereotypical “social movement,” which often encounter criticism for being “too much talk, not enough action,” Take Back the Land has succeeded in finding houses for displaced individuals through a creative yet simplistic technique: moving people into foreclosed properties.

It’s easy to wonder how this is accomplishable and why the movement is yet to come across serious issues with law enforcement. In an ABC News segment, Max Rameau, a spokesperson for the movement, offers a good reason: “this [foreclosed house] is a complete waste.  This is not benefitting anyone.  It’s not benefitting the bank, it’s not benefitting the community, it’s not benefiting the families.  There’s no reason this house is empty.” (Rameau also wrote a book about developing a homeless village in an effort to provide affordable housing for low-income people, “Take Back the Land: Land, Gentrification and the Umoja Village Shantytown”).   Furthermore, rather than face trouble with the law, the movement, at least in Miami, is gaining the police’s support.  ABC spoke with the city’s Chief of Police, who expressed a refusal to enforce eviction notices, stating, “what Social Good would be served by arresting this mother, taking her away from her children?”

The movement has gained traction in several parts of the country, and while it’s not officially a non-profit, it’s website indicates that it has networked with “Local Action Groups” in cities coast to coast, ranging from Atlanta to Madison to Portland to Rochester.  While not a policy-promoting organization, Take Back the Land’s approach mirrors a policy alternative discussed both in our blog as well as at Mayor Rawlings-Blake’s recent Vacant’s to Values summit, Code Enforcement.

The theory behind Code Enforcement involves heavily cracking down on delinquent property owners to ensure that they meet the city’s code; if they do not, the government, in one step, can turn the property back to the market, where it will be sold in a competitive auction.  The idea behind the notion is that it would give property owners a strong incentive to maintain their homes while redirecting properties to a better owner if they do not.  Similarly, by putting families back into vacant homes, Take Back the Land helps ensure that the homes are once again properly maintained and meeting code, keeping neighborhood property values up and benefitting the broader community.  Their residents pay utilities, giving added business to companies that provide these services.

There are thousands of foreclosed properties in Baltimore and millions in the nation, the effect of which, in addition to harming families, encumber neighborhoods and by extension, capital markets and economies.  Rather than high-minded policies, Take Back the Land provides a plainspoken way to mitigate this crisis, and rather than sitting back and spouting out ideas, they are acting. By doing so, they begin to make progress towards their stated objectives of encouraging the perception of housing as a human right, local control over housing, community-based leadership, and direct action campaigns.  To be sure, plenty of their operations are illegal. However, policymakers and activists alike can benefit from the organization’s can-do spirit and human rights oriented strategy.

What will happen to Fannie Mae and Freddie Mac, and What Could it Mean?

Image Source: National Public Radio

Over the past several weeks, countless reports have emerged focusing on the fate of the government-created private loan securitization companies, the Federal National Home Mortgage Associate and the Federal Home Loan Mortgage Corporation, colloquially known as Fannie Mae and Freddie Mac.  The former is, famously, a product of the New Deal, finding its birth in a 1938 amendment to the Roosevelt Administration’s Housing Act, passed four years earlier.  At the time, the organization’s primary function was to inject capital into local, main street banks, which could in turn issue more mortgages, almost all of which were insured by the Federal Housing Administration, also established by the 1934 Act.  This resulted in an increase of home-ownership at a time when it was desperately needed, as well as the creation of a major market for secondary mortgages. Fannie stayed intact after the Depression ended, and the proportion of American home-owners rapidly increased, which perhaps paved the way f or the contemporary notion that owning a home constitutes some fundamental facet of what’s known as the “American Dream.”

Fannie only grew from here—the government opened the company to private investors in 1954, and in 1968, in order to accommodate the expanding market for secondary mortgages, the government split Fannie into two.  Freddie came about in 1970, in an effort to provide competition in the secondary mortgage market, which would ultimately lead to more accessible loans.  In time, Fannie and Freddie gained the ability to purchase and issue securities, leading to the development of the paradigmatic thirty-year fixed rate mortgage. They have been the focus of targeted policy efforts (i.e. the Clinton initiative to expand loans to low-income Americans), and they’ve shouldered considerable blame for purportedly encouraging the financial crisis.

This latter point has been vigorously debated along partisan lines, with folks on the right criticizing the organization for overseeing the expansion of easy credit, which, they argue, tipped the economy over the edge.  Those on the left level the blame on the financial industry, for their relentless practice of utilizing exotic new tools in order to securitize bundled mortgages.

No doubt, politics, one way or another, helped feed the Obama Administration’s desire to phase out these two giant entities.  While the Administration’s plans remain complex and difficult to follow, the New York Times, in a recent editorial, delivered a brief summary of each of three proposals released by the Administration:

The first option, for a system that is virtually all privatized, would result in the highest mortgage rates. It could imperil the availability of traditional, 30-year fixed-rate mortgages, which currently exist only because of federal backing. It would also curtail the government’s ability to mitigate a credit crisis — leaving taxpayers exposed to protracted downturns and possible bailouts.

The second, which involves a partial federal guarantee, raises similar cost and access problems. Theoretically, it would give the government a way to keep credit flowing in a crisis, but it would be difficult to shape a program that is small in good times and expands in bad.

Under the third and most promising option, losses on mortgages and related investments would be covered by capital set aside by banks and insurers or by other private institutions in the mortgage chain. On top of that, the government would provide reinsurance — essentially catastrophic coverage — but only for mortgages that met strict underwriting criteria and at a cost that would cover future claims.

As a someone who decisively is not an expert, my lay person’s reaction is that in it’s current setup, these governmental institutions serve to propel a financial industry (whose recklessness has been demonstrated) by continuing to back their activities in the form of government insurance.  As for option number one, which the Times implies to be the worst, numerous banks—the very same ones whose names became infamous for catalyzing the crisis—have already offered their own proposals to “Buy Pieces of the Fannie-Freddie Pie,” which by extension suggests their desire to not only continue but increase the industry’s practice of privatizing and trading complex securities backed by other people’s mortgages.  Even the “most promising” option proffers a way for the government to continue backing such “investments.”

I wish there was more talk about the fact that it doesn’t make sense to place calculated bets–“investments”–on pieces of other citizens’ mortgages, the way it wouldn’t make sense to purchase a fire insurance policy on your neighbor on your neighbor’s house.  But clearly, the Obama Administration, first and foremost, must grapple with realities of politics, as these proposals indicate.

Talking With the Experts: A Conversation with David Marcello

Professor David Marcello

Welcome to the second portion of yesterday’s interview with New Orleans housing expert David Marcello. In the following conversation, Professor Marcello discusses strategies to curtail blight and encourage racially and socio-economically diverse neighborhoods:

Harsha Sekar: Like New Orleans, Baltimore faces tremendous problems with urban blight.  There’s a commonly held (yet perhaps unfounded) belief that Charm City contains “more row homes than people.”  True or not, it’s undeniable that blight is a huge problem in Baltimore, and any casual observer driving through one of the city’s more under-resourced neighborhoods could pick up on this in a heartbeat.  What strategies to curtail urban blight have you advocated?  What has worked in New Orleans, and what has failed?

David Marcello: I’ve relentlessly recommended for years that the city employ one of the most conventional weapons in the municipal arsenal: code enforcement. Code Enforcement has been a core function of cities since the 1901 Tenement House Act in New York City. We’ve created an exemplary administrative process in Louisiana for health, housing, and environmental code enforcement hearings that can lead in extreme circumstances to a sheriff’s sale, moving blighted property away from a negligent owner and into the hands of a new, more responsible owner. That transition in ownership takes place in a competitive public auction that shifts the property from one private owner to another without the necessity of intervening public ownership.

This last feature of the recommended “code enforcement” strategy stands in stark contrast to the outcome of an expropriation process, which was for many years the favored strategy of our local redevelopment agency, the New Orleans Redevelopment Authority, or NORA. I never thought NORA’s strategy of using expropriation as a blight remediation tool had much chance of success. In a city with tens of thousands of blighted properties, expropriation is simply too expensive and too time consuming to get the job done. Even worse, at the end of an expropriation proceeding, you’ve put the blighted property into the hands of a governmental entity that’s then confronted with the challenge of doing something with the property. Far better, I believe, is to use code enforcement as an incentive for people to fix up their own property or, failing that, using sheriff’s sales to move ownership from one private party directly to another, taking intermediate governmental ownership out of the equation.

HS: Both New Orleans and Baltimore are intensely segregated cities, and, as you know, segregated housing has led to segregated neighborhoods, schools, and other public institutions, with devastating consequences for underprivileged, often ethnic minority urban residents.  Do you propose or advocate any ideas to alleviate the crippling reality of residential segregation in New Orleans and other urban areas?

DM: New Orleans certainly has its share of segregated housing problems, but it’s worth noting that this was not historically the way things were in New Orleans, where humble shotgun housing existed in close proximity to grand mansions, providing a mix of income and racial diversity with which other cities were unfamiliar. In recent years, we’ve seen a lot of our humble housing “gentrified” into middle and upper income housing, and that’s certainly fostered greater income and racial segregation of the city’s residents. We should look for ways to diminish that effect by subsidizing rental and rehabilitation programs aimed at putting more of the city’s resource-limited residents into those types of existing housing units.

Our older neighborhoods reflect the diversity of housing structures that were built over many decades or even centuries. We need to restore within those older neighborhoods the income and racial diversity that characterized them in an earlier era. New Orleans had many healthy neighborhoods of mixed-income housing long before that concept took flight in the late 20th Century.

HS: It seems like the hottest new trend in urban planning nowadays are so-called “Mixed-Income Communities,” which, from my understanding, usually emerge as the result of public-private partnerships.  Policy-makers believe that intentionally designed mixed-income neighborhoods are the key to preventing gang violence, blight, and drug abuse, some of the most palpable problems that plagued the public housing projects constructed in the fifties and sixties. New Orleans, Baltimore, and most other major cities have developed such communities and are likely in the process of contracting for more.  How have these developments fared in mitigating the aforementioned problems?  What do you think about this potential new paradigm of urban housing?

DM: I think it’s too early to tell how well or poorly the post-Katrina mixed-income housing developments will fare. We’ll probably see mixed results, with some properties maintaining a balance of mixed incomes while some others acquire a disproportionate share of low-income residents. Still others may be challenged to survive financially, and we’re likely to confront the problem of what to do with a failed multiunit apartment complex.

I don’t feel quite the same level of enthusiasm that some people do for the model of Government as producer of a utopian “City on a Hill.” Here in Louisiana, we’ve seen how badly-managed government programs like The Road Home can first raise and then bitterly disappoint expectations. So when I hear references to “intentionally designed” neighborhoods, I tend to think, “Nice idea for new towns or beachside communities; maybe not so great for New Orleans?” At a charrette held two months after Katrina, I said, “I’d rather see people given some latitude to build back properties on their own initiative, even if it means that some of those properties turn out to be ugly, rather than inflict on this unique city some cookie-cutter pastel-colored vision of ‘our town’.” I still feel that way. What makes New Orleans New Orleans is the rich diversity of its neighborhoods. That’s true not only of its housing stock but also of the diverse cultures nurtured within those neighborhoods.

I would prefer to see Incentives built into the zoning ordinance and housing finance programs that empower individuals to make their own decisions about how to build back New Orleans. I trust this process of “accretion” more than I trust one agency’s single-minded vision of “intentionally redesigned” neighborhoods. We’ll keep our city’s cultural and architectural diversity intact by keeping our diverse residents fully engaged in the rebuilding process.

Taking a Turn to the Big Easy: A Conversation with Housing Expert David Marcello

Professor and Policymaker David Marcello (Image Source: Tulane Law School)

Today’s post will mark the the first interview of Talk to St Ambrose’s “Talking with the Experts” series. Professor David Marcello, a prominent policymaker and civic leader in New Orleans, has kindly responded to my questions about housing policy issues.  In addition to his academic duties at Tulane, Professor Marcello’s experience in New Orleans includes serving as the statewide coordinator of the Conservation Coalition–the first statewide environmental lobby in Louisiana.  He also headed the state’s first public interest law firm, The Louisiana Center for the Public Interest.  He has advised and served under several New Orleans mayors, including as Executive Counsel to Mayor Ernest N. “Dutch” Morial, the city’s first African-American mayor.  Under Mayor Marc Morial, Professor Marcello successfully chaired the city’s Charter Revision Advisory Committee, which resulted in the first complete revision of the city’s home rule charter.  Recently, Professor Marcello co-chaired Mayor Mitch Landrieu’s Blight Transition Task Force.

This post contains the first half of our interview.  The second half will appear tomorrow.

Harsha Sekar: The issue of housing in New Orleans has been deeply affected by Hurricane Katrina, whose impact has posed enormous challenges in providing affordable housing for low and middle-income people and delivering adequate housing for displaced residents, most of whom fall into the former category. What strategies have you advocated with the  goal of providing affordable housing for low-income citizens?  How can other mid-sized cities, like Baltimore, learn from the dilemma that New Orleans continues to face after Katrina?

David Marcello: Five years after Katrina, New Orleans finds itself facing significantly different housing needs from those that prevailed in the immediate aftermath of the storm, but our housing finance incentives are still structured in such a way as to favor the same types of housing development that they were promoting five years ago.

After Katrina, large numbers of people sought to return to a city where vast numbers of housing units were no longer in service due to flooding. Considering the severe housing shortage that existed at the time, there was some logic in structuring housing finance incentives to foster large new multiunit apartment complexes that could quickly accommodate the needs of tens of thousands of displaced residents who urgently wanted to return to the city.

Now, in the wake of 2010 census results, we recognize that New Orleans is going to be a much smaller city—currently, about two-thirds the size that it was before Katrina. Moreover, our formerly displaced residents are no longer planning by the thousands for their imminent return to the city; many have taken up residence in other cities and have no plans to return to New Orleans. The post-Katrina “flood” of residents back into the city has slowed to a “trickle,” and that change should change our focus from large-scale development to small-scale rehabilitation of housing.

New Orleans was already an overbuilt city pre-Katrina, having reached its peak population of roughly 650,000 residents during the 1960s. By the year 2000, only approximately 485,000 residents remained to occupy a housing stock that had been built four decades earlier to accommodate more than 150,000 people who were no longer living in the city. Now we’ve lost almost another 150,000, so the disparity been “houses built” and “people to live in them” is even greater. Katrina destroyed many thousands of housing units in New Orleans and severely damaged many thousands more, but even with that loss, much remains in the built housing environment that can be rehabilitated to accommodate New Orleans’ 21st Century housing needs. That’s where our housing finance incentives should be directed currently—toward rehabilitation of existing housing, not new construction of residential mega-plexes.

Much of New Orleans’ most historic housing was either untouched or only mildly impacted by Katrina’s flooding. There was a reason why early settlers built New Orleans on the “sliver by the river” that gives the Crescent City its nickname—because that was the high ground, less susceptible to flooding when the Mississippi River periodically overflowed its banks in the days before the Corps of Engineers built levees to protect the city from flooding. This earliest, historic housing gives the city much of its charm, attracting the visitors who fuel our tourist economy. We’ve much to gain as a city, a community, and a culture in restructuring housing finance incentives to favor rehabilitation of that historic housing stock. We’ve much to lose if incentives remain tilted in favor of multi-unit apartment complexes, because for every 100 new rental units that come on the market there’s a corresponding reduction in demand for occupancy of the older historic housing. New construction undercuts the market for rehabilitation of the city’s historic housing, and in turn threatens to undermine the unique culture that gives New Orleans its worldwide appeal.

We need to restructure residential financing incentives to favor the rehabilitation of existing housing stock.

HS: New Orleans has also been characterized as a “laboratory” for government policies that encourage NGO’s and non-profit organizations.  Indeed, the city possesses a disproportionate amount of housing non-profits that are similar in function and organization to St. Ambrose.  Have non-profits played an effective role providing equal opportunity housing for New Orleanians who need it?  What do you feel is the appropriate function for non-profits and NGOs in this endeavor.

DM: I think in New Orleans we can only talk about “government policies that encourage NGO’s and non-profit organizations” if we first introduce the conversation with the proposition that, “Power abhors a vacuum.” Nonprofits surged in New Orleans after Katrina—not because government action encouraged nonprofits and NGO’s, but because government inaction demanded it. Nonprofits had to do more because local government was doing so little and was so ineffective.

Our residents recognized that they had to look to themselves for recovery and renewal, not to City Hall. Neighborhood groups all across the city responded to that need with an unprecedented outpouring of civic activism. New Orleans also benefited hugely from the volunteer activism that poured into our community from around the country—student volunteers, faith-based organizations, philanthropic organizations, first responders—from all across America they came to our assistance, and this city still feels a deep and abiding sense of gratitude for their help.

Happily, we’ve enjoyed more vigorous and capable leadership in City Hall since the mayoral transition that took place in May 2010. But even so, there is a continuing need for nonprofits to play a role across a broad front of needs. For example, the Fair Housing Action Center has relentlessly opposed housing discrimination in the metropolitan area. The Center repeatedly hauled officials from adjacent St. Bernard Parish into federal court, pursuing a series of contempt orders in a successful multi-year battle to secure “open” housing policies. That need to fight housing discrimination continues, and it’s a task well-suited to fearlessly independent nonprofits like the Fair Housing Action Center.

HS: As a follow up to the previous question, many have argued that NGO’s have, in too many instances, served as a proxy for the government, in that they have provided a service that should be the responsibility of the government, such as encouraging equal opportunity housing and supporting diverse neighborhoods.  Indeed, many housing NGO’s are supported almost entirely with government funds. Critics suggest that the rapid growth of NGO’s in the last decade has led to the further “privatization” of government services and inefficiency.  Being a policy-maker in a city with a strong NGO presence, what do you feel about this argument?

DM: I can see where that might be a problem in some cities, but I don’t think we’ve seen that effect here. Far from serving as a “proxy” for government, our neighborhood associations have traditionally played more of an oppositional role relative to government. They contribute to a pluralistic dialogue that takes place among neighborhood residents, developers, and city government. We need to empower neighborhood associations so that they can play more of a role in that ongoing dialogue and give voice to the legitimate interests of neighborhood residents. Our recently adopted master plan calls for a structured system of public participation, and we will see such a system created within the next year. Public participation is the best antidote to an incompetent or unresponsive government. Nonprofits will always have a role to play in that context.

Tune in tomorrow the Part II of Talk to St. Ambrose’s Interview with Professor David Marcello.