Clinton calls for foreclosure moratorium and mass loan restructuring… good ideas but missing a step
Missed this the other day, thanks to Andrea for the tip. From a press release issued by Senator Hillary Clinton on Tuesday:
Senator Clinton is calling for the creation of a new Home Owner’s Loan Corporation (HOLC) to launch an effective mortgage modification effort on the scale and scope of the successful Depression-era program. This must be the next step in addressing the credit crisis. Today, two million homeowners carry mortgages worth more than their homes, holding $3 trillion in mortgage debt. Senator Clinton was among the first to propose a modern-day HOLC, which bought mortgages from failed banks and modified terms to keep people in their homes. The original HOLC saved one million homes and returned a profit to the Treasury. We can save roughly three times that many today by creating a model for fixed-rate mortgages that factors in risk and gives flexibility to homeowners tomake payments they can afford, which would become the gold standard for safe and affordable mortgages.
With the government holding the note on so many of these mortgages securities, Senator Clinton is proposing a temporary moratorium on foreclosures and a temporary freeze on mortgage rate hikes in adjustable rate loans. She is also calling for use of the FHA’s refinancing initiative, passed into law this summer, containing many of the reforms Senator Clinton previously proposed. Nearly three million adjustable rate mortgages representing more than $1.3 trillion in debt are scheduled to increase rates in the next two years. We cannot afford to ignore another wave of foreclosures.
As people who followed the primaries closely know, Clinton has been pushing the moratorium idea for a long time. But the bailout negotiations, and the real possibility of linking a moratorium to a comprehensive refinancing strategy (not to mention the political heft she’s gained), make it much more interesting.
But it also underlines the extreme importance of getting control of the actual mortgages as part of a deal to buy out the banks’ “troubled” mortgage-based securities.
Clinton says “With the government holding the note on so many of these mortgages securities…” But holding the securities is not the same thing as holding management authority over the underlying mortgages – the kind of authority that would allow the government to stop foreclosures and carry out mass restructuring.
It’s entirely possible — likely, in fact — that the best proposals now on the table from the Democratic side of the bailout debate would leave almost untouched the powers of the same mortgage servicing companies that created Cleveland’s foreclosure disaster… the people who’ve brought us mass evictions, mass vacancy, mass neglect and deterioration, and bulk selling of foreclosed properties. There’s no reason to expect these corporations to change their “foreclose and dispose” business model just because it’s the taxpayers who will now be taking the consequencess, rather than the banks.
Clinton, like every other participant in this debate, is assuming that stopping foreclosures and protecting taxpayers are two different things. This is a fundamental misunderstanding of the situation. They’re largely the same thing. Here’s why:
Once the government buys those mortgage-backed securities, the only way to preserve and enhance their value — the only way for taxpayers to get some of our our money back — is to halt the ongoing destruction of the value of the underlying mortgages and homes.
It is not only, or even mostly, “the housing market” that’s driving the foreclosures and vacancies and depressed neighborhood home values that have reduced the value of mortgage-based securities. To a large extent the causation goes the other way: Foreclosures and evictions because of terrible management by servicers lead to vacant houses that sit unguarded, lose their plumbing and siding, and plummet in value taking the rest of the housing market with them.
The servicing companies that routinely fail to do their jobs and work out deals to prevent foreclosures (I’m looking at you, Citi Residential and Wells Fargo) are the same companies that mismanage the vacant houses, let them fall into physical distress, and then sell them for ridiculously low prices to a few bulk-buying flippers and e-Bay hustlers. They’ve done it for years, heedlessly wreaking horrible damage up and down the investment chain. And they’re still doing it. And they’ll go right on doing it until somebody makes them stop.
So if the Congress wants to protect the taxpayers’ investment in the banks’ “toxic paper”, the first line of defense is to take control of the management of the mortgages and real estate that the paper represents. The government won’t get that control automatically by buying up the paper. It has to insist on control as a precondition to buying the paper.
With management control of the underlying real assets in the government’s hands — and clear legislative direction that managers’ priority must change to long-term asset preservation, keeping people in their houses, and collaborative strategies with local communities to rebuild equity — we might have a shot at getting some of our $700 billion back.
Otherwise, kiss it goodbye.