The foreclosure crisis still divides us into two camps. There are those who believe that foreclosing rapidly on homes subject to defaulted mortgages is vital to clearing the market. Others believe we should do everything we can to keep people in their homes, urging loan modifications to forestall foreclosures.
John Taylor, President and CEO of the National Community Reinvestment Coalition, falls solidly in the latter camp. Taylor would like to see widespread mortgage modifications that would allow homeowners in danger of defaulting to keep their homes. Taylor is on the board of directors of the Rainbow/PUSH Coalition and the Leadership Conference for Civil Rights. He has also served on the Consumer Advisory Council of the Federal Reserve Bank Board, The Fannie Mae Housing Impact Division as well as The Freddie Mac Housing Advisory Board. He is extremely passionate on why his idea is the right choice to help turn around the real estate market.
LL: There has been so much overleveraging in the real estate industry and lower interest rates can only help so much, what needs to get done with this new Congress looking at Financial Reform with Fannie and Freddie because they have not been address yet.
JT: You are absolutely right. It’s kind of like pumping plasma into a patient while the patient is still bleeding. We need to stanch the foreclosure crisis first. So the government has to get serious about this problem. The Administration’s voluntary approach to foreclosure prevention has probably done as much as it can possibly do, and even by their standards has not done enough.
They have to step up the pressure now to achieve better results. The Federal Housing Administration (FHA) and Fannie and Freddie are the only securitizers in town now until the private market comes back; , they ought to be able to get banks and servicers willing to cooperate and modify these loans heading to foreclosure.
It must be done. Because it is absolutely going to slow down any type of economic recovery if we have the eleven million more foreclosures projected by Wall Street analysts; if they go through, it’s going to triple the number of foreclosures we’ve experienced. How is that going to help the economy? So you have to put on the table the idea of taking as many of these troubled loans as possible and putting the homeowners in sustainable, modified loans, that are based on their ability to pay. Banks should have made these kinds of loans, which the homeowner could actually pay back, in the first place.
LL: But what about the millions of people who purchased homes they could afford? Why should people be allowed to stay in homes they had no business buying in the first place, because they were way out of their price tag?
JT: Was it a massive, malfeasant, greedy, lending industry that caused the problem or was it stupid consumers who should have known better? I think the evidence overwhelmingly supports the former conclusion. But that doesn’t matter anymore; we don’t have time for that debate. The question now is what do we do to stop the foreclosures that are killing our economy by a thousand cuts, a hundred fold, every month.
Foreclosures are the mortal enemy to economic recovery. We can keep on pumping money into the system to create liquidity for banks and in the market, but it’s simply not going to succeed until they plug the hole at the bottom of the well!
So what has the Administration done to stem foreclosures? They have put in place a voluntary program, which has done roughly half a million permanent modifications since the program began, but there’s been three and a half million foreclosures during the same time period and seven million foreclosure filings.
That kind of performance earns merits a failing grade by any one’s standards.
So what do federal officials need to do? They need to stop carrying their hat in hand when dealing with Wall Street; The government can pound these guys, and they have all the leverage they need by merit of the fact that the banks can’t do business without them. I hear people critical about the government’s role in the private lending sector; but without the government we don’t have a housing market right now. Without the government there is no Fed window and bond issuance and the liquidity they create. Without the government there is no securitization. Wall Street isn’t doing these things; there is almost no private label securitization happening.
You know, all these banks are sitting on loans heading into foreclosure because the banks that hold the second liens are refusing to modify; the banks that hold the second liens are expecting the first lien holders will take the entire hit, and they’ll get paid out at 100%. Well these banks holding the second liens need to be taken to task, because they are holding up a lot of modifications.
Also, what are Fannie and Freddie waiting for? The government holds tremendous regulatory authority over them; but government officials says they can’t tell them what to do, even though the government says no not really, Fannie and Freddie that they are just in conservatorship. and we can’t tell them what to do. That’s just not true. The government is in the position to tell Fannie and Freddie to refinance hundreds of thousands of loans tomorrow, but Fannie and Freddie and the administration are looking at their bottom line so they are charging extra fees above the private market on anything that has any type of risk in it. Fannie and Freddie have not reduced the principal on one single mortgage.
They have done half of what the banks are doing.We said from the beginning, to Secretary Paulson and then Geithner, that the foreclosure crisis can’t be resolved by the voluntary participation of the banks.
You can’t keep on sweetening the pie and expect them to do the right thing. The truth of the matter is that when push comes to shove the banks have no choice because the government has the ability to say to banks that if they want to do business with the government, including the Federal Reserve, FHA and the GSEs, they must cooperate and restructure these loans. If that had been done, some investors would have had to take some losses; but they are losing now at a very slow rate, prolonging the problem.
The government should use the money they earned from TARP and purchase hundreds of thousands of loans at a discount—at a discount because they are not worth what they once were—and then recycle them into good, permanent, sustainable loans. Where people lost their jobs and can’t afford their homes, other solutions are necessary. And abandoned properties should be foreclosed on and the properties should be put back on the market.
But we’re not seeing practical solutions to the foreclosure crisis pursued. It seems to me people are just throwing up their arms, letting everything go down and saying if we don’t get through all these foreclosures we will never see a bottom. I think its a terrible way to get through all this, and it will undermine our economy for years to come.
LL: What you are proposing is extremely unpopular. How do you convince Americans this is the way to go to help the industry heal?
JT: People have a right to be mad, but they shouldn’t be mad at 17 million plus homeowners that have either gone into foreclosure or are heading there. Seventeen million homeowners can’t all be stupid and greedy and wrong. The behavior of the industry is what changed; the financial services sector tricked and trapped these people, without the proper oversight to rein in their irresponsible lending practices.
Should people have known better? Yes. But the industry was rigged to push through these loans and convince people they could afford to do it. But again, it’s too late to rehash these tired debates. If we do not respond to the foreclosure crisis now, we can guarantee the pain that will be felt by most of the people in this country. Families facing foreclosure don’t want a handout, they just want reasonable help. In fact, most of the people that got bad loans, perhaps 90 percent of them, are still paying on that sub-prime loan. Some of them have just simply fallen behind.
If we don’t do restructure their loans and keep people in their homes, property values will drop and everyone will be impacted who owns a home. We need to share the pain now, because otherwise it will affect us more broadly. Many people might think well, gee, if these homeowners had been smart they should have gotten the loan I got. Well that loan was not available to them because the system was rigged to push people into higher cost loans. Why? Because brokers and lenders got their fees and earnings that were connected to convincing people to take out more expensive mortgages with predatory terms and conditions. That’s what was wrong.
You can sit there and say the people should have known better, and call that the moral hazard. Or, you can recognize the real moral hazard here was allowing an industry to prepay upon a substantial portion of the home-owning public, to give them loans with terms and conditions the lenders knew were not sustainable.
The moral dilemma then is do you put the burden on the people affected, while the banks are allowed to continue with their business? With the exception of investment products, when other other consumer product goes bad, the burden is put on the manufacturer, not the consumer.
LL: Do you think the new congress will create good regulation laws?
JT: The conservatives basically want to get rid of Fannie and Freddie, they don’t want the competition for the private market. The Democrats are acting too timid.
Congress has not shown that they are willing to push for all lenders to make responsible, sustainable loans to working-class people, and I’m not hopeful that this will change in the next Congress. People need loans for businesses, housing, other purposes, but they must be fair and sustainable loans, otherwise we get into trouble again. Expanding the Community Reinvestment Act would accomplish this goal, but too many members of Congress are too may be beholden to Wall Street to make that happen.
LL: Do you think these two far extremely will be able to meet in the middle?
JT: I think in the end, Fannie and Freddie will be different then they are today.
They’ll have considerably less market share. We ought to preserve their role in as a securitizer of affordable housing loans, but that remains to be seen. Hopefully that core aspect of Fannie and Freddie’s purpose will remain intact.
LL: Where are we in the Fannie and Freddie put-back Tsunami?
JT: This is a very astute question, and I’m really surprised more reporters are not focusing on this. This is the real issue that will force everyone to come to the table and I think that’s a good thing. Fannie and Freddie are sending back bad loans; where they believe there was widespread fraud and abuse in the origination process. The GSEs have reps and warrants to be able to force the lenders to verify if they followed underwriting guidelines. If you acted fraudulently, then you ought to be responsible for any mortgage that is going bad.
That’s the way it’s supposed to work. That’s also a protection for the taxpayers and investors.
This is the same process that private label securitizers use. The private labels can also turn around and do the same thing, and there the problems are even more severe, because the private labels encouraged and purchased massive amounts of the no-document, low-document, verbally guarantee loans. These were the standards they created and accepted. So it’s difficult for them to go back to the lenders and say “you’re responsible for this now.”
And there are other complicit parties. When things started to go sour, I went to one of the credit agencies, S&P, and they showed me one of the forms they used in their rating process. The lenders had to describe the nature of these loans, and on this particular document showed the y loans with low-documentation, no-documentation, piggyback second loans, Yield Spread Premiums, long prepayment penalties, balloon payments; in short, they had all those things that got everybody into trouble. It was all codified by the investment banks and the rating agencies. The problem was that the investors didn’t know about this.
LL: What inning are we in in this put-back tsunami?
JT: To use your baseball metaphor, we are in the second inning of a nine-inning game, where all the pitchers are striking people out and no one is getting any hits. We can play this game out for another six to seven years with millions of foreclosures piling up and watch property values continue to deteriorate and unemployment go up, or we can grab the bull by the horn and get serious about this.
The federal government must mandate that the private sector modify certain loans such that they match the borrowers ability-to-pay. Voluntary compliance simply has not and will not work. These new loans should match the incomes of the borrowers so that a responsible borrower has a sustainable loan. Those who have lost their jobs should be given a reasonable period to find suitable employment, and if unsuccessful, have the time to pursue other housing options.