Refinancing Falls by the Wayside

For people facing foreclosure — and for the housing and community development groups trying to help them — there’s been little to cheer about lately.

The $700-billion bailout bill approved last week offers little or nothing to homeowners in trouble. A measure to change federal law to allow bankruptcy judges to modify mortgage loans didn’t make it in the final version. Nor did a proposal to set aside for affordable housing some 20 percent of future profits from the sale of toxic mortgage-backed securities. (Republicans feared the money would go to ACORN, a community group the GOP links to voter fraud.)

As foreclosures mount, the bill’s provision calling for more loan modifications will have only a modest effect, considering that subprime mortgages have been sliced into pieces and sold to investors around the globe. Add to the insult, the debate over the bill reignited old charges that the Community Reinvestment Act, an anti-redlining law, caused the mortgage crisis, and that poor and minority borrowers are to blame.

It doesn’t get any better from there. The credit crisis is likely to make it even tougher, if not impossible, for homeowners to refinance their loans — even those who aren’t already underwater on their mortgages.

With all that government money dedicated to the bailout, meanwhile, there won’t be much left over to put toward rebuilding neighborhoods or creating affordable rentals. Cities and towns that used revenues from real-estate transactions to fund housing development won’t have that kind of money to spend anymore, given the collapse of the housing market.

Amid the rubble, some supporters are trying to remain hopeful that things will get better; that government and housing counseling groups might find creative ways to come up with solutions to modifying loans or reusing foreclosed properties. That’s for later. For now, there’s just the shell-shocked feeling that comes with facing an uphill battle that just got a lot steeper.

“The landscape looks like the Roman Empire after being attacked by Attila the Hun,” said Alan Mallach, a senior fellow at the National Housing Institute and former visiting scholar at the Federal Reserve of Philadelphia, referring to the outlook for helping homeowners and rebuilding neighborhoods. “It’s really bad out there.”

When the mortgage crisis began in 2007, the economy was still in pretty good shape, Mallach noted. Now, the foreclosure rate is worsening as the economy weakens, meaning homeowners and their advocates will face even more difficulties going forward. “We’ve got a double whammy here,” Mallach said. “The economic crisis has taken on a life of its own. The big question: Is how much worse is it going to get? Who knows where this is going.”

It’s tougher in some places than others. In Cleveland, Kermit Lind, a Cleveland State University law professor, considers the bailout as something crafted for housing markets on the coasts and in Nevada, with little thought given to the problems of Midwestern cities that have declining home values and populations. “The fallout from the bailout,” Lind said, “will be as bad or worse than the mortgage crisis itself.”

Cities with a significant amount of abandoned and foreclosed properties, like Cleveland and Buffalo, had been making progress in holding banks accountable for their empty houses by hauling them into municipal housing courts and fining them. In this way, cities could recover at least some of the costs of cutting the grass, boarding up the homes and other maintenance.

They could even try to bill banks for the costs of demolishing deteriorated properties. Banks and servicers often pointed fingers at each other over responsibility for the properties. But faced with fines, they paid up. Now, with the government buying up millions of mortgage-backed securities and taking control of Fannie Mae and Freddie Mac, it will be harder than ever to determine who should be held accountable for foreclosed properties.

Just because the government is purchasing the securities won’t mean it will own or control enough of them to make decisions on all 2the mortgages — something credit experts call the “Humpty Dumpty” problem. They can’t put the mortgages back together again, and even if they could, many homeowners have second mortgages that would also need to be refinanced.

That could mean the government ends up in charge of the properties, without being able to renegotiate the loans. Since federal laws preempt state laws, Lind said, it’s unlikely the city can haul the government into court. Cities already facing declining property tax revenues will face even more costs to either keep up foreclosed homes or tear them down.

To Lind of Cleveland State University, it means a huge exacerbation of the already troublesome problem of toxic titles, in which banks fail to follow through on foreclosing on worthless properties, and their ownership remains in limbo. Vandals target the vacant houses, and entire blocks and neighborhoods decline. Lind doesn’t hold out much faith in the government doing a better job, pointing to the U.S. Dept. of Housing and Urban Development’s notorious reputation as the nation’s largest slumlord, for it ignores so many of its properties.

It took Cleveland decades to recover from HUD and Federal Housing Administration housing scandals in the 1970s. This time around, said Lind, “we’re talking about generations, rather than decades, to recover.”

The question of whether the government will be any better at loan modifications than the private sector remains to be seen. In an encouraging sign, Bank of America, which bought the troubled subprime lender Countrywide Financial Corp., announced Monday a $3.5 billion plan to renegotiate high-rate mortgages for 400,000 Countrywide borrowers. But it’s still unclear how well the plan might work, and how many borrowers and servicers will participate.

In the presidential debate Tuesday night, Sen. John McCain, the Republican nominee, called for the Treasury Dept. to buy up bad mortgages and renegotiate them. But buying the mortgages directly still won’t get around the problem of modifying securities sliced into pieces and scattered among many investors. In addition, only borrowers who were creditworthy when they took out their loans will qualify — which may eliminate millions of people who took out subprime loans with no downpayments.

It’s also an unknown whether cities would have some legal say in the government’s handling of foreclosed properties in their jurisdictions. Cities like Cleveland have been trying to establish land banks to buy vacant land and abandoned homes, which might give them more control over those properties and some leverage to negotiate with the government. But a land bank requires legislative approval, which has become a lengthy process, Lind said.

Still, with all the gloom and doom, housing groups are already considering how to begin again, pushing for new strategies to help homeowners and communities.

If Bank of America follows through with the loan modifications, “it would begin to break a huge logjam,” said Ellen Seidman, who studies the financial-services industry at the New America Foundation. It would set an example for other lenders — and for the government. “But I’d hold off on getting excited about the serviced loans,” Seidman said, “until we see something starting to happen.”

On another front, if Congress returns after the election with a large Democratic majority, it most likely would move forward with some sort of mortgage rescue bill that would more actively prevent foreclosures, she said.

Given the magnitude of the mortgage crisis and the credit crunch, it’s possible that the government may be more open to new ideas — and prove more effective — in handling loan modifications and foreclosures than people now might assume. Consider that the federal government’s solutions to past crises, from the Resolution Trust Corp. during the savings and loan debacle to the Home Owners’ Loan Corp. during the Great Depression, were considered great successes, Seidman noted.

The government, for example, could offer incentives, or even sanctions, to servicers to prod them to modify loans. Some servicers have been willing to deal, while others have rejected any overtures. Under the bailout bill, the Treasury Dept. can buy up second mortgages, which may ease the way for more loan restructurings.

As the federal government has scrambled for solutions, the states are moving forward. Mallach, of the National Housing Institute, testified this week on behalf of a proposed New Jersey law that would allow former homeowners to remain in their homes as tenants after foreclosure, until the house is actually sold to someone who intends to use and occupy it.

In most cases, delinquent homeowners have been automatically evicted following a sheriff’s sale, leaving a house vacant for months or even a year or more, until a new owner does something with it. During that time, houses are often vandalized and left in disrepair.

In Philadelphia, Sheriff John Green adopted a policy to hold off on foreclosures until both sides go into mediation. So far, that mediation is resulting in fewer foreclosures, Mallach said. Many borrowers go into foreclosure because they can’t, or won’t, communicate with their servicers. Mediation puts them face to face to work something out.

Just recently, HUD began releasing money to communities from the nearly $4 billion set aside in the mortgage rescue bill passed over the summer to help communities acquire and fix up foreclosed properties. The money isn’t nearly enough to tackle all the foreclosures facing cities, but if it’s handled well and targeted to specific neighborhoods, it could make a big difference, Mallach said.

That money represented a big win for housing groups, noted Robert Zdenek, a board member of the National Housing Institute and a community-development consultant. But with the credit crunch and 6.5 million foreclosures expected in the next few years, “it feels like we’re putting out a brush fire with a wildfire coming up right behind it.”

That housing groups didn’t get what they wanted for homeowners isn’t surprising, he and others said. They’re a loose coalition of grass-roots organizations, ranging from some that handle sophisticated financial deals and others that provide one-on-one counseling. In a lopsided mismatch, they were up against the powerful and well-funded financial services industry.

During the bailout debate, The Wall Street Journal described one financial services lobbyist typing on his BlackBerry at a Washington Redskins game, following the bill’s progress on the Hill.

The shame of it all is that, during the 1990s, housing and community-development groups grew in sophistication and made their mark in neighborhoods. Cities like Newark began to have a comeback, Zdenek said. It’s worrisome to think of going backward.

But at a time when the groups would like to be working on loan modifications or finding new money to help homeowners, they’re pulled in many other directions. This week, for example, the National Community Reinvestment Coalition had to spend its time and energy organizing yet another press conference to refute the belief that the Community Reinvestment Act caused the housing crisis.