The Importance of Consumer Protection

President Obama with Elizabeth Warren, Prospective Head of the New Consumer Financial Protection Bureau

To many of us, developing greater consumer protection measures is common sense: every day, we see families foreclosed out of their homes or evicted from their rental units because they did not (or in fact could not) understand the financial product they purchased.  On the lending side, which we see much more commonly at St. Ambrose, these products often come in the form of adjustable-rate-mortgages.  In such a loan, the initial interest rate often starts low but rapidly increases over time, leading the mortgage holder to believe that they are getting a deal at first only to find out later that they will be unable to make payments and may end up in foreclosure.

We’ve come across situations in which homeowners were not told that the interest rates would rise over time or where banks have misrepresented the product entirely, suggesting that the interest rate is fixed.  The latter scenario happens frequently when banks market products to buyers whose first language is not English.  Sometimes, we even see direct credit lenders selling products to low-income, under-resourced clients in order to “help” them purchase a home.  Often times, hidden fees are imbedded in the loan product, whereby the buyer is penalized substantially for late payments.

These stories are common among housing counselors. Beyond the housing world, other industries have long played the same game.  Credit cards, for instance, often fail to clearly disclose the interest rate for buyers intending to pay a lower-end monthly installment.  Rent-to-Own schemes are another classis example. Companies that engage in International Money Transfers—or companies that help Americans transfer money to family members and friends over seas (a multi-billion dollar industry)—often fail to disclose remittance fees, or transaction fees they charge customers.  Likewise, these companies frequently do not notify their customers of the exchange rates on transfers, which, for obvious reasons, can be crucial to the amount of money a customer is willing to send and the commensurate fee they will owe.

These situations are the reason for the creation of the new Consumer Financial Protection Bureau, for which the White House has selected Professor Elizabeth Warren to head.  As the CFPB’s excellent website explains, before the financial crisis, the federal government could not adequately monitor the market for unfair (and perhaps illegal) practices because too many different agencies existed with varying roles; inevitably, cracks emerged, and sleazy companies slipped through them.  The CFPB intends to rectify this problem by functioning as a centralized agency that monitors predatory scams across industries.

Beyond its importance to consumers, the Bureau is crucial on a systemic level.  Perhaps the main cause of the financial crisis was the proliferation of securitized loan products, (many of which were backed mainly by home mortgages).  Investors (and the Wall Street banks that facilitated their purchases) demanded these products highly, incentivizing main street banks to continue to hand out credit, even when buyers were less-than-credit-worthy.  Eventually, this chain, coupled with the lack of government oversight, poor public policy, and failed public-private partnerships, collapsed, leading to the recession.

The CFPB would ensure that products like poor loans do not pervade the market like they once did, which would lead to significant economic consequences.  Moreover, Ms. Warren, a Harvard law professor with an unimpeachable record of standing up for Average Joes, is the woman for the job.

However, Congress must confirm her first, and backed by special interests, the confirmation may not materialize.  (For the latest example of crude opposition, see here). Whatever happens, we know that kick starting the CFPB, a project that his been on the drawing board for years now, would make the job of St. Ambrose and similar non-profits around the country much, much easier.

Talking With the Experts: An Interview With Dr. Matthew Kachura

Baltimore Neighborhoods Indicatory Alliance Program Manager Matthew Kachura (Image Source: University of Baltimore)

Today, we Talk To St. Ambrose have posted our second interview of our “Talking with the Experts Series,” and we are honored to host Program Manager for the Baltimore Neighborhood Indicator Alliance-Jacob france Institute, Dr. Matthew Kachura.  As many of you already know, Dr. Kachura is a hugely respected community member and activist on behalf of Baltimore City.  He is likewise a pre-eminent scholar in the areas of housing, community economic and workforce development, and other issues affecting urban communities.  Dr. Kachura recently conducted an innovative study examining the effects of foreclosure on Baltimore’s schoolchildren, which gained much deserved local and national attention, as it remains one of the only empirically-backed projects studying the residual, far-removed affects of the foreclosure crisis.  Dr. Kachura has also conducted influential research on the Baltimore Empowerment Zone, the earned income tax credit, and commuter issues, among many others.

Again, we are honored to host such an important and distinguished scholar and community member.  My interview with Professor Kachura is below.

Harsha Sekar: It was fascinating to read the results of Phase I of your study on the effects of foreclosures on Baltimore’s schoolchildren. For me, one of the study’s most salient implications concerned the interrelationship of social problems.  It appears that public policies that encourage affordable housing will not be effective without the implementation of a broader welfare state, as widespread access to decent housing seemingly cannot materialize without strong neighborhoods, schools, and access to healthcare.  Given the findings of your study, can policymakers effectively curtail the problem of inadequate housing without simultaneously addressing the needs of other, related social institutions?

Matthew Kachura: The short answer is no.  I believe that urban issues, whether it is affordable housing, high unemployment, social ills such as crime, or issues relating to education, are all interconnected and that policies that take into account this interdependency need to be created and implemented.  Trying to address one issue without recognizing that there are a host of other issues related to it will not lead to sustainable or long-term improvement.

HS: Following up on the last question, what are some of the other, less obvious residual effects of foreclosure that you have noticed in your work?

MK: I think a non-obvious issue is exactly what we set out to identify.  Little attention has been paid to the smallest victims of foreclosure – children.  It is not just that children are also victims of foreclosure, but that the increased mobility resulting from foreclosure can have lasting, long-term effects on their social and personal development and educational performance.  These negative impacts might not occur in the year following the foreclosure, but research has shown that missing days of school as a result of having to move can lead to an increased chance of a student dropping out of school, not completing their degree and in the long run earning less income.

HS: Your study also catalogues the disproportionate effect of foreclosures on minorities.  While many commentators have discussed this issue, few academic studies document this phenomenon with empirical data.  How has the foreclosure crisis functioned to reinforce systemic racism?

MK: We found several interesting findings as a result of this analysis, including the largest numbers of students who were affected by foreclosure in Baltimore City were African American.  This was not surprising though since two thirds of the residents of Baltimore City are African American.  There were two other important findings.  First, the share of Hispanic students impacted by foreclosure had been increasing to a point where the share of students impacted by foreclosure was the same as the total percentage of students attending the City public schools.  Second, we believe the share of white students impacted by foreclosure was not accurately counted, potentially being significantly undercounted.  According to American Community Survey data, nearly a quarter of the children in Baltimore City are white but only 8% of children that attend the City public schools are white.  This means that these students are attending other schools – most likely private schools – and were not included in the analysis.  Overall though, the fact that African American residents and their children were affected by foreclosures in such large numbers supports the facts that predatory lending policies and sub-prime loans were targeted to those persons who could least afford to lose their home.  The loss of the home, the primary vehicle to building wealth for many of these families, only perpetuates a vicious cycle of poverty.

HS: At Mayor Rawlings-Blake’s recent Vacants to Values Summit, the market-drive notion of “Code Enforcement” was promulgated a means to reduce blight in the city, which would impose sheriff sales on properties that do not meet the city’s code.  How do you feel about this tactic, and what other policies do you advocate to incentivize property owners to invest in Baltimore’s underserved neighborhoods?

MK: I believe that the Mayor’s plan has merit and there have been a variety of other strategies taken in an effort to reduce blight and to turn vacant housing into occupied housing.  There are issues with using code enforcement including identifying and locating individuals to serve them with the necessary paperwork, issues relating to selling the properties at Sherriff sales, and then trying to turn them into occupied properties.  Many of these properties are so beyond being able to be lived in, they will require significant repairs and persons willing to take the time and expense in making the repairs before anyone can live in the property.

I also believe that there are already a number of policies that are making strides in having residents invest within Baltimore’s neighborhoods.  Among these are live where you work programs, which also encourages employment, Healthy Neighborhoods, and the Neighborhood Stabilization Tax Credit.  I also believe that the City’s use of data and its Housing Typology model supports the use of strategic investment – targeting neighborhoods with the types of interventions that are needed most within those neighborhoods instead of spreading resources too thinly across a variety of neighborhood types.  Most of all, I believe that residents living in Baltimore’s neighborhoods are the best means to encourage other residents to invest and live in Baltimore City.

HS: Much of your scholarly work examines economic development in urban areas.  How have established NGOs like St. Ambrose contributed to economic development and vibrancy in the Baltimore area over the past few decades?  What do you feel is the role of NGOs in stimulating economic activity relative to that of the city government and the private sector?

MK: NGOs are a critical component to the overall continued health, vitality, and improvement to Baltimore City and its neighborhoods.  NGOs have been recognized as an important partner in economic development strategies that cities, such as Baltimore City, rely on for their ability to produce results and make an impact.  With fiscal constraints and the need to provide the same if not improved services for a shrinking residential base, NGOs have become a more important partner that the City has embraced to push economic and workforce development.  NGOs typically can operate without the bureaucracy and red tape that government agencies have in place, making them, in many cases, more effective and efficient in creating job opportunities and in neighborhood vitality.

Congress Proposes Cut to Important Foreclosure Counseling Program

A Foreclosed Home on the Market (Image Source: CNN)

We’re a little late commenting on this news, but the proposed cuts in the U.S. Housing and Urban Development Department’s primary program that appropriates funds for foreclosure prevention counseling has caused considerable buzz throughout the community development world.  Needless to say, St. Ambrose, like many other non-profit organizations in Baltimore and around the nation, would take a palpable hit if the measures materialize.

Here is the summary from the New York Times:

[The] proposal for the current fiscal year, which is scheduled for final votes in Congress imminently, cuts $88 million from the Department of Housing and Urban Development’s budget for loan counseling programs, including for reverse mortgages, a HUD spokesman confirmed Thursday. Some $9 million of that total is reserved for reverse mortgage counseling, which helps borrowers understand the benefits, costs and risks, of such loans

HUD’s program, the Housing Counseling Program, has made an enormous impact in the effort to mitigate the foreclosure crisis.  In the last few years, the Housing Counseling Program has delivered individual counseling to more than four million families in the midst of the foreclosure process.  The program has worked to prevent mortgage delinquency for more than two and a half million households, with almost one million avoiding foreclosure altogether.  Is has helped more than half a million renters and homeless individuals resolve landlord-tenant matters and other legal issues.  Finally, hundreds of thousands have benefited from pre-foreclosure counseling, which takes place before proceedings commence, enabling many families to refinance their homes, obtain reverse mortgages, and stave off disaster entirely.

These cuts could be severe, no doubt, and they are the product of a highly politicized Congress obsessed with slashing spending they perceive to be “wasteful.”  Indeed, part of the reason that this proposal has emerged relates to the public’s misunderstanding of foreclosure prevention counseling and its societal significance—a misunderstanding that has arisen because it’s difficult to articulate how this kind of counseling can provide both huge financial and emotional relief to homeowners and families.  And counseling has received poor press because of the failures of programs like HAMP and the government’s inability to regulate lender practices, topics that we have covered extensively in the past.

Despite these setbacks, we at St. Ambrose believe that nationally sponsored foreclosure counseling provides systemic help in alleviating the current crisis.  This is why the state of New York, for instance, has proposed providing not only counseling but guaranteed legal assistance to residents undergoing foreclosure, and several other commentators have pointed out the importance of counseling as well.  Here, we see it working first hand, every day.

If you have been in the foreclosure process and have received counseling or legal aid, please call your Congressperson, tell your friends to call theirs, and feel free to share your experiences here.

New Program Brings $40 Million to Maryland for Foreclosure Prevention

Official Logo of HUD, Which Administers the Program

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.

Baltimore’s Vacants to Value Summit

Mayor Rawlings-Blake announcing her “Vacants to Value” plan to curb blight (Image Source: baltimorecity.gov)

by Millie Hrdina

I was among 600 plus, who attended Mayor Stephanie Rawlings-Blake’s Summit on Vacants to VALUE (V2V): Addressing the Challenge – Breaking New Ground. Because of the overflow crowd, it was relocated to the Baltimore Convention Center.

Breakfast with the Mayor was followed by a full day of break-out sessions, lunch with a keynote speaker, and a networking reception with the Mayor. Nuts and Bolts of V2V introduced the leadership team of Baltimore Housing, outlined the strategies, partners and goals of the mayor’s new initiative to address the impact of blight in our communities. The current vacant housing situation, it was explained, was 50 years in the making. There are about 30K vacancies. Of which 14K are lots and 16K houses. The city owns about ¼ and the other ¾ are privately owned. The challenge is that for 2/3 of them there is no market.  To meet this challenge, a six point strategy plan was introduced.

My day went like this: Promoting Stronger Neighborhoods Through Code Enforcement described one of the strategies being employed by the City. CHIP (Computerized Housing Inspection Process) is being reorganized from 74 to 64 districts and a new approach with more active observation of vacancies is being implemented along with other tactical code informant items.

The Working Power Lunch included Allan Mallach’s informative Keynote: V2V in a National Context. He emphasized that any strategy must be sensitive to market reality and encouraged finding the sweet spot of the market, focus on risk vs potential, maximize neighborhood market impact of every public dollar and identify creative non-development uses for heavily disinvested areas.

The panel of speakers at Suggestion Box: Dollar Houses and Other Ideas made clear that tax cuts and dollar houses were not in the plan. One panelist stressed location, location, location – meaning that rehab would not work in depressed areas and Mr. Mallach outlined what to look for from the city: 1. reasonable taxes, 2. Quality services, 3. Quality infrastructure and environment, and 4. addressing and moving forward on issues and problems. In the second afternoon session – It Doesn’t Have to be Housing: Open Spaces and Adaptive Reuse, Beth Strommen, Office of Sustainability, talked about the recent census numbers. Planning should be focused on what Baltimore is! It is a city with a population of 621,000 and should not worry about returning to the all time high of ~850,000. She explained the concept of “food deserts” and outlined Baltimore’s sustainable program hope to change food policies. Other panelist addressed open green spaces, adopt-a-lot agreements and Main Street needing steroids.

I’ll admit my heart was at the second session. Not only do I feel it is potentially the easiest means to handling a large segment of Baltimore’s blight but quite possibly the cheaper of all the opportunities which exist to us as a community. There is a great deal of grant monies available to assist the partners in the cost. To me it clearly belongs high on the list of options in a 10 year plan for Baltimore. It develops a broader scope of utility and creates more community pride than most of the others.

It appeared to me, as well as other attendee that I have since spoken with, that the large majority of the audience was developers. I hope that as the city goes forward with developing a 10 year plan it continues this conversation and broadens the scope of community partners inviting all walks of citizens to step up and double their efforts to revitalize Baltimore shifting vacants to value.  Click here for Mayor Stephanie Rawling-Blake’s V@V web site.