State and federal agencies, as well as private lenders, could and should do more to keep people from being driven from their homes through foreclosures, witnesses testified at a hearing held by U.S. Sen. Robert Menendez (D-NJ) in Plainfield.
The session highlighted Menendez's new bill to encourage "shared appreciation mortgages" on homes that have plunged in value following the collapse of the housing bubble. The concept, which has been used by a few banks, involves a lender reducing the principal on a mortgage in exchange for a share of any future increase in value.
With many homeowners "underwater," owing more on mortgages than their homes are worth "through no fault of their own," Menendez said some mechanism is needed to encourage banks to find an alternative to foreclosure. In the long term, shared appreciation mortgages would be better for their bottom line than searching for buyers at sharply reduced prices, he said.
Hearing participants praised the legislation, but also called for measures such as encouraging lenders to sell mortgages in bulk to nonprofit agencies that would keep people in the homes; directing federal agencies that hold half the nation's home mortgages to agree to modifications; and restoring funds for mortgage counseling.
"Keeping people in their homes when reasonable loan modifications are possible, and the reform of the broken home loan servicing industry, should be the number one priority for Congress," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action.
The hearing came in the wake of Thursday's announcement of a roughly $26 billion settlement between 49 state attorneys general and five big banks over the use of forged documents and false swearing to perpetrate foreclosure frauds. Participants gave lukewarm assessments, saying theshould help, but falls short of being the game-changer portrayed by federal and state authorities.
"With people underwater by more than $700 billion, you wonder how much $25 billion is going to have an effect, especially when it will be spread out over three years by the banks," Menendez said. "There's a real need now."
Legislative steps like Menendez's bill "could make a lot more difference in the long-run than the settlement," said Alan Mallach, a fellow at the Brookings Institution.
The Senator and a panel of witnesses emphasized the need for a wide range of fast action to avert what could be a tidal wave of new foreclosures in the state. For the past six months, New Jersey officials have estimated that as many as 100,000 new foreclosure cases are ready to be filed following delays caused by moratoriums, legal proceedings and the national negotiations.
As it stands, "one out of every 10 homes in Plainfield is in foreclosure," Menendez said, adding other communities around the state face similar problems.
"As a homeowner, I have to say that it can be pretty tough to maintain a mortgage," said city Mayor Sharon Robinson-Briggs. "It's directly related to employment, and we have many people in Plainfield who have been laid off, fired, or asked to take a reduced salary."
Wayne Meyer, president of New Jersey Community Capital, said his nonprofit has had success negotiating to buy some groups of homes already owned by a lender or facing foreclosure. The goal is to keep people in their homes, either through mortgage writedowns or as tenants after foreclosures, and maintain neighborhoods, but roughly $50 million more is needed to ensure the program maintains itself as a revolving fund, he said.
Participation from more lenders would help, but sometimes the circumstances are odd. Meyer described acquiring homes from one lender for "20 cents on the dollar, but the banks are not willing to write down the principal on their mortgages to 60 cents on the dollar because of 'moral hazard,'" the theory that the borrowers should be fully responsible for the debt.
"Putting people into mortgages they should not have been in, that's another moral hazard," Menendez said.
He was particularly critical of public and quasi-public agencies, such as the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) for successfully resisting mortgage modifications and inclusion in the national fraud settlement. On Thursday, Pro Publica and NPR reported that Freddie Mac invested in complex securities that benefit if borrowers are unable to obtain modifications of high-interest rate mortgages.
Mallach agreed the mortgage giants must be "reformed big time," but added the long-term, fixed-rate mortgage market could not maintain reasonable rates without the sort of government back-up they represent. The government acquired both companies in 2008 after they guaranteed numerous bad loans made by private lenders.
He backed the idea of allowing capable nonprofits to assemble significant amounts of housing stock to preserve neighborhoods. But he cautioned they must be fully vetted and committed to the properties.
Green said that approach is preferable to having banks effectively control large swaths of communities through foreclosures and decisions on where to direct new lending that could shut out many people and places.
Krishna Garlic, CEO of Brand New Day, said the housing bubble and subsequent Wall Street crash created problems for people in all walks of life. While some programs already aim to keep borrowers in their homes, many need help negotiating the often complex and confounding procedures of banks and government agencies, she said, illustrating that with the trials faced by one client.
Garlic endorsed Menendez's call for national standards to guide mortgage modifications, because as it stands, people like her client often fail to get help when her agency's counselors believe they qualify.
"Banks should be responsible for the cost of healing the afflicted communities," she said.
Some programs, such as the federally funded New Jersey Homekeeper program run through the state Housing and Mortgage Finance Agency, do offer hope for people trying to keep their homes, according to several speakers. The program provides up to $48,000 over a two-year period to help people keep their homes.
But Menendez said he is "disappointed" that only 54 homeowners have been accepted so far, saying that lags behind other states.
"Fifty-four is not a good number," Salowe-Kaye agreed, but said some of that has to do with the program's marketing and a procedure that begins over the internet before referrals to counselors at the nonprofit groups.
In a statement, the state Department of Community Affairs said its has made more than $5 million in loans, to 127 recipients, since the start of the Homekeeper program. But the department recognized that pace was not quick enough and obtained more leeway in underwriting criteria from the U.S. Department of the Treasury, according to acting Commissioner Richard Constable 3d. As a result, HMFA expects to meet a goal of 2,000 loans a year, he said.