While the national unemployment rate of 10.2 percent is a sobering reminder of the depth of this recession and the protracted timeline a recovery will take, the challenges posed by long-term unemployment are far greater.

“We are breaking every record post-Great Depression on long-term unemployment,” said Heidi Shierholz, an economist with the Economic Policy Institute. Right now, around 35 percent of those without jobs have been unemployed for more than six months, a figure that adds up to 3.6 percent of our country’s labor pool.

Image by: Matt Mahurin

While economists are divided about the best way to combat this growing problem, most agree on how it happened. The current recession exacerbated an ongoing economic shift from manufacturing to a service base. Troubles faced by Detroit’s Big Three automakers fanned the flames, rendering the skills of many workers obsolete. Even as local economies withered on the vine, workers were rendered immobile, locked into their homes by the real estate crash.

Long-term unemployment is dangerous because it can have a snowball effect, says Kevin Lowden, managing economist at the Milken Institute. The longer someone is out of work, the more likely he or she is to default on his or her mortgage, even low-risk borrowers at the time when the loan was originated.

“You also see significant issues in terms of the effect on consumer demand due to the dramatic increase in savings rate,” he said. While this increase in savings is good for the economy long-term, right now that frugality comes at the expense of consumer spending that could lead to employers hiring more workers.

This epidemic of long-term unemployment also puts an added burden on government coffers. “This is direct drain on budgets in two ways,” said Dean Baker, co-director of the Center for Economic and Policy Research. Government doesn’t collect income tax on laid-off employees, and when these workers go onto unemployment or disability rolls, this creates an additional drain on the system.

For instance, the increase in workers applying for disability has shot up. Currently, some 7 million adults are on disability, an influx so overwhelming that the trustees of the Social Security program predict that the disability fund will be emptied by 2017 if nothing changes.

This mass migration to disability status is primarily a function of our employer-based health care system, according to Lawrence Katz, a professor at Harvard University. “If you have a pre-existing condition, even if you get another job there will be problems with your coverage,” he said. “The one place you can go is disability, where you get onto Medicare. And once they go on, they basically never come off.” Health plans currently under debate in Congress would subsidize low-income citizens and families, which would include the unemployed, as well as ban insurers from eliminating pre-existing conditions, which make going off disability feasible. Currently, those jobless for a long period of time have nothing to fall back on after their COBRA benefit expires.

Even if those who have been unemployed long-term make it back into the workforce, their future earning power suffers. There’s some evidence that post-layoff retraining can mitigate this, but only under certain circumstances. A study out of the University of Chicago’s Harris School of Public Policy Studies found that attending one year of community college gave displaced workers a 5 percent wage boost. Unfortunately, the vast majority of workers enrolled in such programs don’t stick around for even a semester, let alone a whole year.

However, for workers that stick it out and specialize in vocational training, science or mathematics, the returns can be even greater. The study’s authors found a 10 to 15 percent jump in wages for this subset of workers, as well as higher returns for those who already had some degree of college education prior to their participation in the program.

To this end, much of the work that is being done to combat long-term unemployment focuses on retraining workers so that their skills are more in alignment with today’s service-based economy. “The economy has changed fundamentally and our workforce system has not,” said Andy Levin, Michigan’s chief workforce officer, who runs that state’s No Worker Left Behind program. “Most people who lose their jobs can’t replace their standard of living without getting significant training because of the rapid and ongoing march of technology and globalization,” Levin said.

No Worker Left Behind began operating in August 2007 and is funded primarily by the Workforce Investment Act, which was created in the 90s and received $1.25 billion in stimulus funding to help dislocated workers. Since then, No Worker Left Behind has trained 102,000 at-risk or jobless Michigan residents for jobs in growing industries like health care, technology and transportation.

Levin has put into place bureaucratic efficiencies, such as standardizing which types of jobs are eligible for training subsidies throughout the state and streamlining the process that lets jobless workers continue to receive unemployment benefits while pursuing additional education. When the program conducted a survey this April, they found that nearly half of the workers who had completed training had landed a job, 86 percent in a field that related to their training.

Other economists say that programs such as No Worker Left Behind, while helpful, don’t do enough to address the root of the problem: the overwhelming lack of jobs. Although the pace at which companies are laying off workers has slowed, companies aren’t rehiring, which means there are still too few jobs to go around. Traditionally, small businesses are the first to hire when the economy picks up steam after a recession; however, small-business financing has dried up due to the credit crunch, preventing entrepreneurs from expanding and adding employees.

“The crisis is just so big at this point with 10.2 percent unemployment that we’re thinking about new direct job creation proposals because the scale of the problem is so large,” said Allegra Baider, senior legislative associate at the Center for Community Change. That group, along with a host of other advocacy and labor organizations, recently released a joint statement calling for new investment in job creation in fields such as infrastructure and education.

“A top priority ahead of job training is we’ve got to fix the labor market and start generating jobs,” said the Economic Policy Institute’s Heidi Shierholz. The Obama administration plans to hold a jobs summit next month examining incentives like tax credits to encourage businesses to hire new workers.

John Challenger of Challenger, Gray & Christmas acknowledged that even if such programs succeed, many Americans will have to make adjustments. “One of the things that’s happening is a steady career at one large company or in a company town is no longer available, and people at all levels can no longer think of their careers as always progressing upwards in income.” Even as they learn new skills, employees also have to be taught how to be flexible so they can adapt to the twists and turns of the 21^st-century economy.

Federal Reserve Chairman Ben Bernanke (WDCpix)

Federal Reserve chairman Ben Bernanke announced last month that the recession was “likely over” and that the economy was in the early stages of a recovery. The problem is, many Americans don’t look around and see a recovery due to the still-abysmal unemployment rate. What’s scarier is that those numbers are probably going to get worse before they get better. The Congressional Budget Office predicts unemployment peaking at 10.2 percent next year and remaining at a very high 9.1 percent in 2011.

Illustration by: Matt Mahurin

“What people care about is numbers that affect their lives — employment, pay, housing. The story in almost all those cases looks bad,” said Dean Baker, director of the Center for Economic and Policy Research. “In one sense the recession will be over, but for all practical purposes, it still will be a recession for most people.”

In other words, we’re looking at a jobless recovery. “What it means is that the economy is recovering for Wall Street and business profits but it’s not distributing that prosperity effectively, and that’s not the recovery we need,” said Andrew Stettner, deputy director of the National Employment Law Project. “It’s not a true recovery until it lifts the fortunes of average Americans,” he added. Waiting for that could take a while: the Congressional Budget Office estimates it could take another five years to get back to America’s pre-crash unemployment rate.

Unlike recessions from roughly the end of World War II until the 1980s, a bounce-back in U.S. jobs isn’t going to come from the nation’s giant manufacturing sector cranking itself back up. While America still does produce goods both for export as well as for consumption at home, the 20th-century manufacturing-based economy has shifted to a service-oriented one, and roughly 70 percent of our economy these days is driven by consumer spending. As a result, recent recoveries have tended to be jobless ones in which the employment rolls take much longer to catch up with the rise in GDP that signals a recovery. After the 2001 recession, it took 17 quarters — more than four years — for the labor market to recover.

The severity of this recession as well as the enormous number of jobs lost is already creating a strain on the nascent recovery, and experts say it presents a number of challenges for average Americans as well as policy-makers. One of the most glaring is the issue of health care. The importance of the ongoing health care debate — and the need for reform — is highlighted by the plight of the unemployed when it comes to health insurance.

Currently, laid-off employees are eligible to remain in their employer’s group pool through the COBRA program for up to 18 months. Historically, many people who lose their jobs turn down the COBRA coverage because it requires individuals to shoulder the entire cost of the premium by themselves. In an acknowledgement that this is no ordinary recession, the federal $787 billion stimulus package includes a provision providing unemployed workers with a 65 percent subsidy of their COBRA premiums for nine months.

This is unprecedented, and yet many economists say it’s not nearly enough. “A lot of the people who start being unemployed aren’t reemployed after nine months,” Burtless said. The number of Americans on the jobless rolls for months or even years at a time is already swelling and expected to grow, which means it’s increasingly likely that the unemployed will run through their COBRA benefits by the time they land a new job. Even if a worker is lucky enough to land a job that includes health insurance (which is no guarantee these days, either), restrictions on pre-existing conditions kick in, leaving an untold number of Americans without a healthcare safety net.

Health insurance isn’t the only issue, though. “It’s a desperate situation because it’s going to be long term,” warned CEPR’s Baker. “Today you have people getting benefits, but people might be out of work for two or three years, and we’re not set up for having high rates of unemployment.” Baker points out that other developed nations are better equipped for a situation like this because of programs like long-term unemployment insurance, housing assistance and health care.

Prolonged unemployment is a double-whammy for those stuck without jobs for extended periods; not only are they out of work, but when the economy rebounds, they’re more likely to be passed over by the companies doing the rehiring in favor of people who have exited the workforce more recently. According to Lawrence Katz, a professor of economics at Harvard University, the unintended consequence of this escalation will be to push more workers into disability and early Medicare programs. “That becomes the only option and the difficulty with that is once people go on disability programs they basically never leave, which becomes very expensive,” he warned.

Benefits like unemployment payments are also facing a similar strain that’s likely to get worse before it gets better. Right now, laid-off workers in the states most severely impacted by the recession can draw up to 79 weeks of unemployment benefits. As with the COBRA subsidy, this is already an extension above and beyond the norm, but it’s not clear how much more of an appetite the federal government has to subsidize long-term joblessness.

There are a couple of encouraging signs that the government does understand the severity of the problem and is taking steps to address it. Support for a payroll tax credit, one oft-cited measure for increasing employment, is gaining support among both parties in Congress. One suggested version would give companies a credit of double the payroll tax for every employee hired or converted from part- to full-time. “We did a new jobs tax credit in the ‘70s that had some impact,” said Harvard’s Katz, adding that a broader wage subsidy would have a similar impact on the private sector but also offer employment support to nonprofits, as well.

The government could take a more direct role in boosting employment, Brookings’ Gary Burtless suggests. “I expect that if job creation is very anemic on private payrolls and continue to have a Democratic administration, there’s going to be a lot of initiative to somehow increase the share of the government’s stimulus efforts on job creation.”

It’s also possible that job-creation programs in stimulus bill may yet play a role in shoring up payrolls, although even pro-stimulus economists think that role will be minor. “It’s probably to date created between 700,000 to a little over a million jobs,” said CEPR’s Dean Baker. “It will make more of a difference, but it’s not big enough.”

There are still a couple of factors that could turn the tide in workers’ favor. Andrew Stettner points out that the stimulus-led investment in clean energy and “green” technology has the potential to put the U.S. back in the manufacturing game. “Right now, we’re borrowing and consuming. We need to move our economy more broadly to producing and inventing by investing in it to make it more competitive,” he said.

On a somewhat grimmer note, if America’s recovery lags behind that of our major trade partners or if the dollar is weak for a prolonged period, a surge in demand for exports could be a silver lining for the employment rate. Similarly, inventories in this country have been pared down so far that a big uptick in demand could lead to hiring, but since so much of what we consume comes from overseas, any employment boost there would be shared with other countries.

The worst-case scenario, says Brookings’ Gary Burtless, is that we experience a recession on par with the very steep one in 1981-82, but without the jobs recovery that followed. If this happens, Andrew Stettner of NELP predicts a societal fragmentation of nearly unprecedented magnitude. “I think you’ll start seeing a divided consciousness between the haves and have-nots by next year. Those who did lose their jobs and their savings will be increasingly isolated.”

Image by: Matt Mahurin

Despite the recent good news that U.S. home prices rose 2.9 percent in the second quarter of 2009, it’s too early to call a turnaround for the battered housing sector. Although this modest increase in the S&P/Case-Shiller national home index is the first uptick since 2006, the number of homes worth less than their mortgages has ballooned. This undertow of debt threatens homeowner stability now, and has ramifications for a long-term economic recovery.

Two new studies reveal that the rate of “underwater” mortgages — that is, where the mortgage debt outweighs the current value of the house — is higher than previously believed, and point to further increases in the coming months.

Illustration by: Matt Mahurin

According to real estate data firm Zillow, 23 percent of all single-family homes are saddled with mortgages worth more than the present value. Moody’s Economy.com offers a similar number; according to that company’s research, 24 percent of all homes have underwater mortgages, up from 15 percent a year ago. Additionally, another 8 percent of homeowners, while not technically underwater, have mortgage amounts that cancel out their equity.

This adds up to some 16 million homes, according to Celia Chen, senior director at Moody’s Economy.com. “Home prices have increased in the last month or two but I think it’s too early to call an end to the downturn,” she said.

That not-terribly-optimistic assessment might turn out to be an understatement. Investment bank Deutsche Bank released a report earlier this month saying that 48 percent — nearly half — of all home mortgages in the country will be upside-down by early 2011. According to Deutsche Bank managing director and global head of securitization research Karen Weaver, the historical rate of mortgage defaults has been about 7 percent. “However, that experience is of limited relevance because it’s from a period of much more moderate home price declines and stricter lending standards,” she cautioned in an emailed response to questions. In today’s economy, it’s more realistic to expect up to 20 percent of borrowers to default.

“This is a slow-motion second shoe to drop on the economy,” said Christopher B. Leinberger, a visiting fellow at the Brookings Institution. ” My concern is that it could be the catalyst for a W, or double-dip, recession. Sure, there are some green shoots but there are also these economic depressants that have to be dealt with.”

New research out of Northwestern University shows that even some homeowners who can afford to make their mortgage payments choose instead to default when their homes plummet in value relative to their mortgages. The study, which surveyed homeowners across the country last December and again in March, found that 26 percent of all defaults are what researchers termed “strategic.” Essentially, this means the homeowner actually has the money to pay his or her mortgage and deliberately decides not to. In parts of the country where home prices have lost a significant percentage of their value, these borrowers decide it’s worth the hit on their credit score to walk away from homes that might never again be worth what they paid for them.

According to Northwestern professor Paola Sapienza, one of the authors of the study, even homeowners who said in a survey that they have a moral objection to walking away from a debt change their mind if the ratio of their negative equity balloons. According to her research, when homeowners’ negative equity hits 50 percent — a not uncommon number in certain communities — 17 percent of homeowners will default, even if they can afford their mortgage payments. Since lenders very rarely sue homeowners for defaulting, the consequences for defaulting are generally limited to a battered credit score for a period of years. The danger is that, since each foreclosure drags down the values of surrounding homes, the number of borrowers handing the keys over to their lender could snowball as homeowners watch their neighbors default.

Worse, negative equity creates a ripple effect that extends beyond the affected homeowners. Even among those not trying to sell their homes or in imminent danger of foreclosure, the lack of a financial cushion in the form of home equity puts a damper on consumer spending. “A lot of people were feeling good about their wealth position,” says Economy.com’s Chen. Now that there is no equity, it’s having a negative impact on consumer spending.” Lower consumer spending leads to decreased retail sales, manufacturing slowdowns and, ultimately, job losses or reduced income. This, in turn, can prompt a new round of mortgage defaults, starting the cycle all over again.

This hurts lenders as well as homeowners. Despite the injection of government capital into banks, financial institutions — especially smaller regional or community banks —aren’t out of the woods yet. The TARP Congressional Oversight Panel said in its August report that banks are likely to need billions more in government support. Even with this aggressive intervention, some banks will still fail. Small and medium-sized community banks, especially those centered in areas that have been hard-hit by the real estate downturn, are the most likely victims. “It’s obviously a negative for banks,” said Economy.com’s Celia Chen. “I expect there will be more banks that go under.” Future bank failures will tax the already-strained FDIC. The agency’s most recent quarterly report revealed that its reserve, which it uses to pay depositors when banks fail, is down to $10.4 billion. Last year, the FDIC’s reserve was $45.2 billion.

Even when the economy strengthens and employment increases, negative equity makes it prohibitive, if not impossible, for homeowners to sell their homes. This will hamper an eventual jobs recovery if workers can’t move to where employers need them to be. “It has cause a significant issue in the relocation industry. People are reluctant to move,” said Joe Benevides, chair of Worldwide ERC, a workforce mobility association. “Employers are finding that their first choice candidate is not able to take relocation for financial reasons.” The time frame for relocating an employee, which includes the time needed to sell the worker’s current home, purchase a new one and complete a move had jumped. The process, which used to take between 120 and 180 days, now stretches from 180 days to as much as a year.

There’s no single solution to the problem of burgeoning negative equity, but industry analysts and policy experts say both short- and long-term fixes are necessary. Mortgage loan modifications are still discussed, although existing programs have barely put a dent in the foreclosure crisis. Some critics say this is because modifications so far have targeted interest rates rather than principal balances. Modifications that target principals are a double-edged sword, though; Casey Mulligan, a professor at the University of Chicago’s Booth School of Business, points out that homeowners may be incentivized to stop making payments on their mortgages if they think the threat of foreclosure will force the lender to cut them a deal. Mulligan suggests a simple solution would be to modify all underwater mortgages, although he concedes that this solution probably wouldn’t pass muster with already-beleaguered lenders.

Christopher Leinberger of the Brookings Institution believes some relief could come from public-transit investment. Since many of the most-troubled properties lie in far-flung exurbs of major urban centers, expanded public transit that makes it cheaper and more convenient for people to get to work in the distant city will increase property values. Leinberger says smart urban planning done around these transit hubs will also have a positive effect; in regions where tracts of single-family homes have been replaced by a mix of high-density residential units (such as apartment buildings) and retail space, property values go up and local tax rolls are bolstered by the presence of commercial property.

A major antidote will be the passage of time; many borrowers experiencing low to moderate negative equity will see investment in their homes pay off eventually. Unfortunately, there’s no way to create a fast-acting fix that mimics this effect. “For the most part, we have to let it happen. We needed a correction,” said Deutsche Bank’s Karen Weaver. “And, as we let the crisis play out, shore up the rest of the economy with low rates and government stimulus.”

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Anyone who’s ever purchased a home knows that the appraisal is a key component. Buyers rely on the appraisal to ensure that they’re not overpaying for their prospective home, while lenders need to make sure they’re not lending more than the home is worth.

But these days, getting an appraisal can be trickier than ever.

Illustration by: Matt Mahurin

As of May 1, new legislation called the Home Valuation Code of Conduct makes getting an appraisal costlier and more time-consuming for would-be buyers to procure — and the added time can even prevent purchasers from getting the best possible mortgage on their new home. This creates a stumbling block for home buyers at a time when the market can ill-afford to discourage buyers. And that’s not even the worst problem.

Advocates for the appraisal industry say that a move towards less-qualified appraisers prompted largely by the requirements of the new regulations mean that already depressed home prices are being undervalued even further. The problem has gotten so severe that even real estate trade groups that called for enhanced oversight in the first place are now working to dismantle its key provisions. And the controversy, some say, also shows how difficult it can be to reform even some of the most egregious practices blamed for creating the housing bubble in the first place.

“Initially we were in full support of the concept because we have for several years now been trying to get the powers that be to recognize that there were significant pressures placed on appraisers to meet certain values,” said Leslie Sellers, president-elect of the Appraisal Institute, a voluntary membership organization that certifies appraisers. Sellers added, “The unintended consequences have created havoc.”

Reforming the appraisal process goes back to earlier this decade, as home prices around the country inflated to what turned out to be unsustainable levels. Appraisers complained on blogs and industry message boards of being pressured by mortgage brokers, lenders and even builders to “hit a number,” in industry parlance, meaning the other party wanted them to appraise the home at a certain amount regardless of what it was actually worth. Appraisers risked being blacklisted if they stuck to their guns. “We know that it went on and we know just about everybody was involved to some extent,” said Marc Savitt, the National Association of Mortgage Banker’s immediate past president and chief point person during the first half of 2009 as the industry geared up for the rollout of the legislation.

Critics of the new regulations say problems started right at the beginning. Instead of being developed at the behest of and in collaboration with appraisers, HVCC was borne out of a settlement deal between the New York Attorney General’s office and Fannie Mae and Freddie Mac, the two giant government-sponsored entities that together make up the engine of the mortgage business. Why the GSEs were targeted by the state of New York is still unclear. The Center for Public Integrity has filed FOIA requests for correspondence between the two entities and the Attorney General to try and find out. Most players in the industry assume that Fannie and Freddie came under fire for buying and selling loans backed by inflated appraisals without verifying if the values were legitimate.

Prior to May 1, many appraisals were ordered by mortgage brokers. It was a convenient, if sometimes overly cozy, relationship. Brokers would go to local appraisers in the hopes of getting a valuation that would reflect a deep knowledge of the town, neighborhood and even street on which the property was located. Some lenders ordered appraisals directly, often through middlemen called appraisal management companies. The HVCC shook up the status quo by forbidding brokers to order appraisals; instead, that task now falls to lenders. Lenders, many of them big, national banks, have turned to appraisal management companies to manage the ordering process rather than try to forge individual relationships with literally thousands of individual appraisers across the country.

As a result, these appraisers have had to align themselves with the AMCs or run the very real risk of going out of business. Although the HVCC currently is only scheduled to be in place for 18 months, once banks create the new AMC-based infrastructure to manage appraisal ordering, it’s likely that individual appraisers will be left out of the loop for good.

The appraisers, not surprisingly, aren’t happy.

First of all, they point out, pressure to “hit a number” came not just from brokers but from lenders and even appraisal management companies as well. The HVCC in its current structure only addresses part of the problem while concentrating power in the hands of the AMCs. The other problem is that AMCs themselves aren’t exactly blameless. In fact, the New York AG’s initial investigation included not only the GSEs and mortgage lender Washington Mutual, but an AMC, too, a firm called eAppraiser.

“This is the bizarre part,” said Brian Davis, a Bloomington, Ill.-based appraiser and founder of the blog Appraisal Scoop. “The original problem was pressuring of appraisers by an appraisal management company, and this puts AMCs in the catbird seat.”

Davis isn’t alone in his view. “AMCs have a lot of money to gain in this. Even if the HVCC is overturned at some point a lot of appraisers are going to be out of business,” said Joseph Eaton, staff writer at the Center for Public Integrity. “It puts the AMCs in a great situation.”

Given that one of the corporations is embroiled in the initial scandal, many in the real estate industry question why the resulting legislation assigns such a major role to these entities.

“More qualified appraisers are dropping out, and using lower appraisals creates lower value down the line,” said Leslie Sellers of the Appraisal Institute. To cover their overhead, Sellers says AMCs are paying appraisers less but charging lenders — who pass the cost along to buyers — more per appraisal. As a result, less-experienced appraisers are taking on the lion’s share of the work, while appraisers who demand a higher fee turn down the AMCs’ offers for more lucrative work.

In addition, these novice appraisers may be valuing homes in areas outside their scope of expertise. Particularly in densely populated areas, even an appraiser who knows one neighborhood well could be completely unfamiliar with another neighborhood or town a short drive away. Industry insiders like the Appraisal Institute’s Sellers also says AMCs demand turnarounds of as little as 24 hours, leaving appraisers little time to do research on unfamiliar locations.

This combination of factors will lead to an artificial depression of home prices beyond the trough created by the subprime crash, Sellers says. Whereas an experienced appraiser would know his or her market well enough to not include foreclosures and short sales when evaluating comparable sales, someone who drove in for the first and only time that day would have no way of discerning these small but crucial details. While no one in the industry denies that homes were valued beyond what they were truly worth during the go-go years, appraising them at fire-sale prices only adds to the market’s pain.

Appraisers’ harsh words for the program were echoed by the National Association of Mortgage Bankers. “Although the HVCC doesn’t mention AMCs, it’s kind of a back door promotion of the AMCs. AMCs are unregulated, and they’re controlling the entire housing market,” charged NAMB’s Marc Savitt.

Even more worrisome, the second part of the HVCC, the creation of an enforcement entity to be called the Independent Valuation Protection Institute that would field complaints of appraisal coercion, has been placed on the back burner due to budgetary concerns. “We need to put some real teeth into this thing,” Savitt said.

Compounding this lack of oversight, a lack of regulation in the AMC industry means that even appraisers who actually are disciplined for artificially inflating home prices can get right back into the business by setting up shop as an appraisal management company and hiring others to do the work for them.

Industry watchdogs point to yet another way the HVCC open the door to impropriety: banks themselves are allowed to own up to 20 percent of the appraisal management companies who do work for them. While Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, an industry trade group that counts AMCs among its member base, calls potential conflicts of interest a “non-issue,” others voice skepticism that an AMC wouldn’t feel pressure to deliver for its parent company.

Even the companies one would think would be jumping for joy — the AMCs themselves — are decidedly lukewarm about the HVCC. “Our comments were very critical for a couple of reasons,” says Jeff Schurman of TAVMA. A big complaint TAVMA shares with most other real estate industry groups is the issue of portability. Previously, a would-be home buyer could get an appraisal through their broker, then shop around to get the best deal on a mortgage. Now, since the lender is in charge of ordering the appraisal, the home buyer can’t use it if they decide they can get a better deal from another bank. Instead, they’ll have to pay for a second appraisal ordered by that lender. This not only means an added cost for buyers, but it’s a potential disincentive for lenders to compete on rates, since buyers will be reluctant to switch lenders after they’ve already spent as much as $750 for an appraisal.

With all of these issues coming to the surface, perhaps it’s no surprise that the industry is battling hard to alter or outright scrap the HVCC. The current president of the Appraisal Institute has been meeting with representative of Fannie Mae and Freddie Mac to try and tweak the verbiage and the requirements contained in the regulation, while a bipartisan bill in the House of Representatives calls for an 18-month moratorium on the regulation. While almost no one in the industry denies the need for oversight in the appraisal process, the HVCC places significant strain on an already damaged housing market.

Martha C. White is a freelance journalist in New York.

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While the plight of homeowners affected by the real estate meltdown has been well-documented, renters too often fall under the radar. Although tenants’ advocacy groups credit recently passed national legislation for including some protections, they charge that the new law only scratches the surface.

The number of renters being forced from their homes is on the rise as foreclosures increase. “We’ve seen a mass increase. I would say it’s up by 50 percent,” said Arlene Bradley, housing advocacy director of Housing Rights Inc. in Berkeley, Calif., a group that provides legal advice and counseling to renters in the greater San Francisco Bay area.

Illustration by: Matt Mahurin

Prior to the new legislation that went into effect last month, tenants were at the mercy of the lender, and the results could be very disruptive. Renters could be forced from their homes with a mere five days’ notice in the state of Arizona, said William Deegan, executive director of the Phoenix-based American Tenants Association.

Under the new rule, which was passed May 20 and took effect immediately, an addendum to a broader housing bill addressing the foreclosure crisis, a lender who takes possession of a property or a new owner who buys the building at auction has to let a tenant stay for 90 days or until their lease is up. The rules are a bit different if someone is buying the property to live in; in that case, they can terminate a lease with 90 days’ notice. “This guarantees 90 days,” said Ed Josephson, director of litigation for South Brooklyn Legal Services in New York. “Before the law they could throw you out in the middle of your lease.”

While those who work with renters across the country say the legislation is a vast improvement over the earlier status quo, they also call the law incomplete. Too often, renters are at the mercy of courts and a financial system ill-equipped to deal with their particular challenges. For one thing, a tenant is still more likely than not to lose his or her security deposit if the owner goes into foreclosure

“The problem is the bank isn’t interested in dealing with you and the old owner is long gone,” said Janet Portland, lawyer and author of Every Tenant’s Legal Guide. While a tenant can take a landlord to small claims court, if they’ve declared bankruptcy — which is common — the renter is probably out of luck when it comes to collecting on a judgment.

The ATA’s William Deegan said this is particularly troubling because renters are more likely to need that deposit when they go looking for a new place to live. “Tenants tend to be poor, young families, the elderly. They fall through the cracks.” Deegan wants a law that would order property owners to put security deposits in escrow and not co-mingle them in an account that can be bled dry.

Another issue is that of property maintenance; too often, renter advocates say, owners let cleanliness and even safety standards lapse, and the banks who tend to inherit the properties aren’t usually equipped to deal with these pressing needs. “Properties often go unmaintained,” said Arlene Bradley of Housing Rights Inc. “That’s an area that’s largely being left to state and local governments to deal with regarding local code enforcement. That’s a big gap right now.”

“If you feel the place is getting shabby but not unsafe, you’re pretty much stuck,” said Portland. While there is currently no requirement at the federal level for banks that take on foreclosed residential buildings to hire property managers, some say this is a necessary next step, especially because the number of large, corporate-owned apartment buildings in foreclosure is expected to rise as the commercial real estate market worsens.

Right now, most of the people uprooted by foreclosure are in duplexes, triplexes or other small-scale lodgings. Often, the home that is foreclosed on is the landlord’s place of residence, too. If larger properties start to fall, this means that potentially hundreds or even thousands of renters could be living in places that are owned by a bank or speculator who picked up the property for a rock-bottom price at an auction.

“This is the beginning of a wave,” said Ed Josephson of South Brooklyn Legal Services. In big cities like New York, many owners bought buildings when prices were at their peak and now can’t make their payments due to falling rents and can’t refinance because no credit is available. “You have a whole parallel world of multi-family crisis,” he said.

Legislating additional tenant protections is a tightrope walk, though. Although the 90-days’ notice provision passed through Congress successfully, other efforts have been challenged. Last month, Rep. Nydia Velázquez (D-N.Y.) added an amendment to a housing crisis bill that would have let the government step in, take over troubled apartment buildings and convert them to affordable housing. This move drew fire from the National Multi Housing Council, a trade group representing apartment building owners and developers.

Giving government the power to seize ownership of properties would choke off what little funding there is trickling into the market, charges Jim Arbury, senior vice president of the National Multi Housing Council. “There were no specifics regarding what would constitute overleveraging of a property,” he said, which would make lenders and developers reluctant to invest.

But there are 95 million renters in America, said Deegan, and they need more legal protection than the corporations that actually own their places of residence. “When you look at this whole economic turmoil, everyone’s jumping through hoops to help homeowners and nobody’s dong anything for tenants,” he said.

Capitol Hill (WDCpix)

While the steady rise of the nation’s unemployment rate has become shorthand for the recession’s impact, many economists say the grim figures — 8.9 percent in April — don’t tell the whole story of Americans’ financial distress. While the plight of the jobless tends to dominate social policy conversations and media coverage, a less-exposed but equally vulnerable population is the millions of underemployed. This diffuse, often poorly tracked cross-section of citizens who bear the individual and collective challenges living on the economic fringes often go overlooked by policy makers and elected leaders.

Illustration by: Matt Mahurin

“The number of people under economic stress is much bigger than the official unemployment rate,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities. Who are these people? The Bureau of Labor Statistics takes a stab at quantifying these people to create a more comprehensive picture of who’s not working and why not. The Bureau identifies categories of Americans it labels as “marginal,” meaning that they are unemployed and have looked for a job in the past, but not recently, and “employed part time for economic reasons,” referring to workers who would take full-time schedules if they could. Once these groups are added to the base unemployment rate, the number climbs all the way up to 15.8 percent in April, the highest number since the BLS began tracking these sub-groups in 1994.

Yet there are some who say even these numbers don’t tell the whole story. Progressive think tanks talk about “skill underemployment.” “It’s the computer engineer who lost [his] job and is now working at 7-11,” said Heidi Shierholz, an economist with the Economic Policy Institute. “They show up as employed, not as a bad labor market outcome,” she said. In reality, though, these workers, are both earning and contributing far less than their potential — one definition of underemployment. The labor bureau’s data-collection also doesn’t take into account the millions of Americans who have had their hours or wages cut in recent months.

There’s no single agency that tracks the underemployed, so researchers have to cobble together data from all corners of the economy to come up with an estimate on disenfranchised workers. According to Philip Harvey, a professor of law and economics at Rutgers School of Law, the United States is short by nearly 23 million jobs, a far greater number than the 13.7 million of officially unemployed workers.

Gertrude Goldberg, chair of the National Jobs for All Coalition, says that lowballing the number of distressed workers leads to an inadequate response. “By under-defining it you reduce the notion of a mass of people at risk in terms of tomorrow,” she said. And while they may disagree on precisely how to count underemployed Americans, nearly all agree that their growing numbers could lead to problems both in the short term as well as in the future.

“When you have productive people that can’t get the hours they need, that represents a huge contraction for the economy,” said Heidi Shierholz of the Economic Policy Institute. Lower paychecks in the case of forced part-time employment means less money going into federal, state and city tax coffers, at a time when many local governments can ill afford a shortfall.

Social Security also takes a hit, according to Shierholz. “To the extent that people paying into Social Security are paying a percentage of their income, as people are seeing their hours reduced, that reduces their weekly paychecks, so that will reduce the amount they pay into Social Security.” In reference to recent concerns about the longevity of the Social Security trust fund, she said, “it is absolutely a contributor to this.”

As bad as this sounds, the damage to individuals’ own retirement accounts is even greater. “One of the biggest factors for having larger 401(k) balances is continuous participation in a plan,” said Craig Copeland, senior research associate for the Employee Benefit Research Institute. Since 401(k) contributions grow from stock market gains, workers who are laid off even briefly miss out on the chance to invest while the stock market is low. Companies are allowed to impose a one-year waiting period on new hires’ participation in retirement plans, so the unemployed who return to the workforce face a “time out” period that could cost them dearly in the long run.

The workers classified as involuntarily part-time by the Bureau of Labor Statistics face even greater hurdles. According to EBRI research, in 2007, only18 percent of male and 26 percent of female part-time workers participate in employer-offered retirement benefit plans. The reason for this is twofold, said EBRI’s Copeland. These employees are less likely to have the extra income to invest in a retirement plan. In addition, most companies don’t even offer retirement benefits for those who work fewer than 20 hours a week.

Underemployment also means that a worker’s Social Security benefits could be reduced when he or she collects them in retirement. This combination of reductions in private and public income streams means that when these potentially millions of underemployed Americans exit the workforce, the government could be facing a crisis of underfunded retirees.

Implications for health insurance are also troubling. Elise Gould, health economist at the Economic Policy Institute, says that in 2007, the most recent year for which statistics are available, only 55 percent of part-time employees had employer-sponsored health insurance, as compared to 74 percent of their full-time counterparts. It’s likely that these numbers have dropped further since then, she added. “There’s been a downward trend in these since 2000, and I would expect these to have only gotten worse.”

This health care gap has serious consequences, according to David Dooley, chair of the department of psychology and social behavior at the University of California, Irvine. Dooley studied the mental-health effects of underemployment as compared with unemployment. Rates of depression, alcohol abuse and other markers were similar for both groups. “The general patterns is that we get the expected adverse effects of complete job loss with inadequate employment,” he said.

However, while programs such as Medicaid and COBRA exist to help the unemployed, there are no comparable health care alternatives for underemployed workers. “If people show signs of depression or increased drinking, they’re not going to have the resources for early intervention,” said Dooley. “If they’re in a downward spiral there’s not going to be anyone to slow it down.”

Despite these troubling clues, though, people like Gertrude Goldberg of the National Jobs for All Coalition say the government hasn’t been aggressive or inclusive enough in designing stimulus programs that help out the underemployed as well as the unemployed. Although the federal government has extended unemployment benefits and given states money to boost the benefits by a nominal amount, none of this helps the employee forced to work a four-day week or take a part-time job to replace lost full-time employment.

Heidi Shierholz of the Economic Policy Institute says not to count on the promised job creation benefits of the stimulus either. “By the time the stimulus package was implemented it was already behind,” she said. “It was only expected to create between three and five million jobs. By the time it got off the ground we were seven million jobs in the hole.” She and others warn that if the underemployed are allowed to slip through the cracks, economic recovery will be all the more elusive.

An empty quad at the University of Illinois (Flickr: BParedo)

With a growing number of college grads finding themselves crushed under the weight of their student loan debt, the Obama administration is considering action that could derail the entire student loan industry.  Groups who monitor campaign contributions, though, worry that the strength of the industry could block any shot at real change.

The student loan industry is big business. A total of $89.5 billion in loans was originated in the 2007-2008 school year, $22.5 billion of which was in the form of private loans. For students, the stakes are even higher. The default rate on student loans climbed from 5.2 percent to 6.9 percent in only a year, and analysts say the number is likely to rise as the recession continues.

Image by: Matt Mahurin

The amount individual students borrow is rising, too. The average graduate of a four-year college accrues $22,500 in student loan debt, according to the National Postsecondary Student Aid Study . Education advocates say that recent grads and current students are going to bear an increasingly heavy burden when it comes to repaying those debts both because of the growing amounts borrowed and due to the increasing reliance on private loans. For the 2007-2008 school year, 14 percent of students took out a private loan, compared to only 5 percent in the 2003-2004 school year.

The tough job market is another major hurdle. The national unemployment rate was at 8.5 percent in March, and there’s evidence that new grads are hit harder than other groups by the country’s shrinking job pool. Research by the National Association of Colleges and Employers revealed that companies are planning to hire 22 percent fewer new college graduates this year than in 2008. Even students who do land jobs after college might not be out of the woods; another NACE study found that the average starting salary for college grads had declined from 2008.

College students seeking financing can apply for federally-backed or private loans. Federal ones have some advantages in that the costs of borrowing are less and the loan programs have a few consumer protections in place: The interest rates are tied to the three-month Treasury bill rate plus a couple of percentage points, and graduates have a six-month grace period after graduation before repayment must start, although in this economy that might not be enough of a buffer. Deferring the loan is possible, although some agreements may tack on the extra interest that accrues during the deferral period. Former students with anemic job prospects can also extend the term of their loan, paying more interest but lowering their payment to a manageable amount each month. [HERE In the private sector, though, offering any of these options is no more than a courtesy on the part of the lender; there’s no legal obligation for them to cut debtors a break. Since the amount of federal loan money a student can borrow is capped, many have turned to private loans to bridge the gap, especially as the cost of college tuition has risen steadily in recent years. “These lenders have borrowers over a barrel,” said Edie Irons, communications director for the Institute for College Access and Success. “They can be uncompromising.” Even in the case of death or a work-ending disability, she added, private lenders still seek to collect.

Private loans also cost more, sometimes much more. Interest rates are generally variable and several percentage points higher than those for federal loans. Add in a missed payment and default rates of up nearly 20 percent — as much as some credit-card interest rates — kick in. In addition, private loan rules about late payments are nearly always stricter; while it takes months of non-payment to be declared in default of a federal loan, private loans can move into default after only a single missed payment, damaging the borrower’s credit. Since employers in some fields have recently embraced credit checks as part of pre-employment background screening, missed student loan payments could potentially damage a new grad’s chances at a job that would allow them to make those payments.

Student loans differ from other debt obligations like mortgages or credit card debt in a few ways, but one of the most significant is their “stickiness” when it comes to discharging them in a bankruptcy. Student loans are one of the very few types of debt, along with child support and some taxes, that are virtually impossible to have dismissed in bankruptcy. In the case of private student loans, although these lenders aren’t governed by the caps on loan amounts and interest rates imposed on their federally-backed counterparts, they still receive the benefit of the bankruptcy exemption.

While help is on the way via recently passed legislation many in the field worry that it’s not enough. Provisions included in the College Cost Reduction and Access Act of 2007 give students clemency on some loan debt if they go into public service or work in low-income fields, but it only applies to government-backed loans. The Higher Education Opportunity Act of 2008, for instance, required for the first time that private lenders spell out in plain English how much students will be paying in interest and what kind of penalties are levied for missing payments; however, it doesn’t go into effect until next year

“That’s not going to keep [lenders] from making bad loans,” said Deanne Loonin, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “It’s just going to require them to tell people when they make bad loans.” Loonin says the legislation is a good start but limited in its scope because it only affects future would-be borrowers, not the many students and new grads currently saddled with cumbersome loans. “Going backwards, you still have all these people who are stuck. We also would like to see some relief for those people.”

One major change Loonin and others would like to see is a modification of the bankruptcy rules surrounding student loans. An amendment that would have made student loans dischargeable via bankruptcy was sponsored Rep. Danny Davis (D-Ill.) last year, but was voted down.

The student loan industry is very generous when it comes to supporting politicians it hopes will look out for its interests. While plenty of banks that offer private loans are regulars on the donation circuit, the powerhouses of federal lending are also paying out large sums to favored lawmakers. The PACs for Sallie Mae and NelNet, two of the sector’s biggest servicers of federally backed loans, turned up at number two and eight, respectively, in a list that of top finance-industry donors that also included banking giants like Bank of America and Citigroup. Sallie Mae gave $800,000 in 2008, while NelNet gave $250,000, according to the Center for Responsive Politics.

One notable recipient of this largesse is Rep. Paul Kanjorski (D-Pa.), who received a combined total of $15,000 from Sallie Mae and NelNet in 2008. Kanjorskiy is a vocal advocate of Sallie Mae. Public policy think tank New America Foundation pointed out in an online article Kanjorski’s personal interest in keeping this lending powerhouse healthy; earlier this month, it shifted several hundred jobs into his eastern Pennsylvania district.

In the tug-of-war over who gets control of these billions of dollars in student debt, industry supporters invoke the specter of massive job losses as an objection to the government’s plan to phase out the middleman in federal loan programs in favor of a direct lending system. Both Sallie Mae as well as the National Association of Student Financial Aid Administrators, an industry trade group, have come up with alternative plans that preserve the role of the servicers. They argue their plans can save just as much money and will preserve jobs, as well.

But it’s not just donations and vote-garnering jobs; lenders also spend a lot of money on lobbying. “Sallie Mae spent $3.4 million in lobbying in 2008,” said Sheila Krumholz, executive director of the Center for Responsive Politics. While this was down from 2007 levels, it’s still a significant investment. “By comparison, Bank of America spent just $4 million,” said Krumholz. “In lobbying is where they’re on par with the heavy hitters. It explains where they’re putting their focus.”

With a new president who has already taken aim at education financing via a plan to phase out private loan programs and handle financing directly through schools, lenders are on the defensive. The administration’s plan for overhauling student lending is facing a fight both from Republicans as well as from within its own party — a measure of how far the industry’s fundraising efforts extended. “The fact that they were lobbying so heavily is indicative of the concern they had last cycle,” said Krumholz. “It appears it was perhaps justified given what they’re facing now. They may have seen the writing on the wall.”

Martha C. White is a freelance journalist in New York.

readydebit.com

Americans are more conscious of debt than ever. Feeling burned by bank overdraft fees of $30 or more, or by credit-card interest rates that can top 25 percent, a growing number of consumers are turning to prepaid, reloadable “cash cards.” These cards have confidence-boosting names like “READYdebit” and “UPside.” They feature the logo of Visa, Mastercard or Discover and are issued by companies like Green Dot Corporation and NetSpend. These cards are sold at retail locations as well as check-cashing storefronts and money-wiring outlets.

For a large segment of users, primarily low- and moderate-income consumers, these cards function as ersatz bank accounts. These consumers are referred to as the “unbanked” in card-industry parlance. With a cash card, those with poor credit or too little money to meet banks’ minimum account balance requirements can participate in the retail transactions most people take for granted: ordering goods online, paying for items with a quick swipe, getting cash on demand from ATMs.

It’s a fast-growing niche; in 2007, $2.1 billion was placed on reloadable prepaid cards, according to Mercator Advisory Group, a market research company that specializes in the payment industry. By 2011, Mercator predicts that number will jump to $14 billion. Green Dot Corporation, one of the big players in the field, says they’ve seen a whopping 50 percent year over year growth rate in terms of dollars loaded onto their cards.

For those who lack the discipline or the know-how to manage their money, these cards can be a lifesaver in that they don’t let a user spend more than he or she has. It’s impossible to overdraw and accrue fines, or tap into a line of credit that could spiral into a nightmare of debt. But while these cards may be beneficial for consumers who want to avoid the temptation of spending beyond their means, they are no panacea. Reloadable prepaid cards have several key differences of which users might not be aware.

First, they’re expensive to use. “The basic situation with prepaid debit cards is that they tend to come with a multiplicity of fees, which make them relatively expensive to use,” said Jean Ann Fox, director of financial services for the Consumer Federation of America. With the exception of Wal-Mart’s $3 Moneycard, most cost $9 or $10 to acquire, and most charge maintenance fees of up to $10 per month after that. Since issuers like to advertise the fact that they don’t charge overdraft fees, it could be easy for a consumer to overlook the fact that everything from withdrawing cash at an ATM to calling customer service costs a couple of bucks. Adding more money to a card can also cost $5 or so if the transaction takes place at a retailer or Western Union location; the place doing the reloading takes a cut, too. Some issuers waive the reload fee if a user has their employer direct-deposit their earnings onto the card.

Want to cancel a prepaid card? Even that could cost $15 in fees. If a user has less than that left on a card, the cardholder can either spend what’s left without going over the amount, which would cause the card to be declined, reload it — for a fee— or just abandon the balance. As a rule, most card companies don’t charge for online account activity, but that might not be a viable option for lower-income unbanked consumers.

The unbanked also might not have the financial wherewithal or feel empowered enough to ask some hard questions about the security of their money after they make a deposit on the card, a prospect that worries consumer advocates and watchdog groups. “It’s an important question given the dollar volume flowing into these cards,” said Sarah Jane Hughes, a commercial law professor at Indiana University. “Whether or not there really is something standing behind those cards is very important.”

Americans with money in ordinary bank accounts are protected by the Federal Deposit Insurance Corporation. If the bank goes bankrupt, the government makes good on depositors’ money up to $250,000. Prepaid card users don’t necessarily have that assurance. It’s common for cash card issuers to pool all their customers’ funds into one account, which could easily go over the $250,000 maximum. What’s more, this kind of set-up would make the card issuer rather than their consumers the FDIC beneficiary if the bank failed.

At the request of advocacy group Consumers Union, the FDIC recently clarified that a provision called pass-through insurance would come into play with regard to prepaid cards. Essentially, this means that the cardholder rather than the card company would get paid. However, the FDIC also spelled out a series of steps card issuers have to take for pass-through insurance to be initiated — and there’s no law that says the card companies have to take those steps. According to Gail Hillebrand, senior attorney at Consumers Union, it’s up to issuers to do the right thing when it comes to protecting their users’ cash.

“The great victory is that these funds can be FDIC insured to the individual,” said Michelle Jun, staff attorney at Consumers Union. “The problem now is it’s unclear if all these cards are set up in this fashion, and it’s not entirely clear which ones are FDIC insured.” In other words, it’s buyer beware.

Lastly, although these cards carry the logo of brands like Visa, Mastercard or Discover, they are not credit cards. While this distinction may help users from getting — or staying — in debt, it also means that no matter how judiciously they use their card or manage their money, these efforts won’t go towards raising their credit score. In a marketplace where lenders are demanding high credit ratings, not building a positive credit history can be a real handicap. Relying exclusively on prepaid cards means the unbanked will have a tougher time breaking out of that categorization. As much as Americans want temptation-busting tools that protect them from the lure of expensive play-now-pay-later loans, opting out of the system via prepaid spending devices carries some hefty costs of its own.

Martha C. White is a freelance journalist in New York. She frequently writes on economics.

As the residential real estate market continues its downward trajectory, the ripple effects of the crisis threaten the $8 trillion commercial real estate market. Offices, stores and industrial buildings are all facing a perfect storm of increasing vacancies and a lack of capital with which to refinance their debt.

“Really since the start of the year the trouble is coming out of the woodwork as far as notices of default, foreclosures, bankruptcies,” said Bob White, founder and president of Real Capital Analytics, a real estate market research firm. “It’s growing alarmingly fast.” Currently, some $50 billion worth of commercial mortgages are in default or foreclosure. White and others in the industry say the worst is yet to come.

Illustration by: Matt Mahurin

“The two key things creating problems are the tenants are having financial difficulties, especially retail tenants, and there’s a dearth of capital out there for even healthy properties to refinance debt,” said Steven Ott, director of the Center for Real Estate at the University of North Carolina, Charlotte.

Like the residential real estate market, commercial real estate loans were bundled into securities. “The commercial mortgage backed securities market and further derivatives built on that have a very similar structure to the asset backed market the residential mortgages were pooled into,” said David Geltner, director of research at the Center for Real Estate at the Massachusetts Institute of Technology. “You have subordination levels governed by credit rating agencies. Obviously in retrospect, those subordination levels were way too low.”

It’s helpful to think of securitization as an accelerant: It lets returns zoom up during a boom, but it magnifies and spreads the pain of losses in a crash. Now, even stable businesses face guilt by association when they try to refinance: skittish over rising default rates, lenders are tightening up the purse strings for everyone. “Even well-capitalized insurance companies or commercial banks don’t want to catch the proverbial falling knife,” said Victor Calanog, director of research for commercial real estate analysis firm Reis. “Values may still fall.”

Unlike the residential sector, however, experts say that lending practices — at least until the height of the boom — remained conservative in the commercial market. A bruising slump caused by overbuilding that created a glut of unfilled supply in the early 90s was still fresh in the minds of many developers and commercial lenders. By contrast, until last year, the United States had never experienced an across-the-board drop in home prices, making it almost believable that values would never weather a sustained, nationwide decrease.

By 2006 and 2007, though, the commercial market succumbed to bubble thinking. Prices increased and lenders began relying only on recent performance when rating the credit-worthiness of commercial mortgages. “The underwriters for these securitized loans were basically very optimistic about the ability of commercial properties to increase their income,” says Reis’s Calanog. In other words, the maxim of ‘what goes up must come down’ went out the window. Analysts are quick to point out that if commercial real estate lenders hadn’t been as disciplined as they were, the problems the market faces would be even worse than they are now.

The problem runs deeper than bubble economics, though. Thomas Bisacquino, president of the National Association of Industrial and Office Properties, says that most of the industry’s coming crisis isn’t due to irresponsible lending, but rather to the way commercial loans are structured. Unlike home mortgages, which are usually for a few hundred thousand dollars and repaid over a 30-year term, banks lend businesses up to tens of millions in shorter-term increments, usually five to seven years. Unfortunately for millions of commercial-property mortgage holders, their terms ending just as the credit market grinds to a near-complete halt. This lockdown of the credit markets means that loans can’t be refinanced, pushing even healthy businesses onto the foreclosure tracks.

MIT’s Geltner estimated that bubble pricing was responsible for an approximately 15 percent run-up in prices, which would have impacted only the most aggressive borrowers when they fell. Instead, he estimates that the commercial sector overall has dropped by 15 to 20 percent already, and will probably drop by that much again before turning around.

Other industry experts agree. The problem is going to get worse before it gets better. “We’re projecting 17.6 percent vacancy for the office sector through the end of 2010, which is the highest level since 1992,” said Calanog. “The last time we saw this was during the savings and loan crisis.” Rising unemployment numbers illustrate another facet of the problem; when companies cut people, their need for space decreases, as well.

Offices aren’t even the hardest-hit of the sector. Retail space is suffering greatly as businesses ranging from mom-and-pop operations to major department store chains fold. “The sector we are most pessimistic about is the retail sector,” said Calanog. “In 2008 we were quite alarmed when we saw a significant decrease in performance, a decline in occupied stock we’d never seen in this sector before.” Since consumer spending has contracted for the first time in decades, retail owners face a grim outlook in the near term.

Just as commercial real estate’s fall has lagged behind the fate of the residential market, a turnaround won’t take place until well after the home foreclosure crisis has been contained. Right now, most of the government’s energies are focused on keeping people in their homes, which means fewer dollars and resources are being funneled into the commercial sector. While the commercial market will receive some of the money the government has set aside to buy various types of loans via the Term Asset-Backed Securities Loan Facility (aka TALF) program, the bulk of TALF funds are going towards freeing up the consumer lending categories of home loans, car loans and credit-card debt. There’s also no equivalent of government-backed mortgage agencies Fannie Mae and Freddie Mac to which most commercial property owners have access.

“We need the government to step in and provide guarantees for the commercial mortgage-backed securities market,” said NAIOP’s Bisacquino. “There is a lot of private equity sitting on the sidelines. TALF can provide the guarantees to get that to return.”

Industry advocacy group the Real Estate Roundtable has a five-point proposal for turning around the commercial real estate market. It lobbies not only for TALF funding but for greater leeway for loan servicers, allowing them to modify loan terms. The plan also calls for changes to accounting and tax rules and encourages foreign investment in the commercial mortgage-backed securities market.

In the future, many want to the government to introduce legislation that requires accountability. “I think part of the long-term solution to this is people have to have skin in the game,” said MIT’s Geltner. “If you get a bonus it has to be based on long run performance.”

Martha C. White is a freelance journalist in New York. She frequently writes on economics.

It seemed like a good idea at the time. Last October, the Bush administration unveiled a plan aimed at helping homeowners facing foreclosure called Hope For Homeowners. Earlier this month, there was consternation and disbelief across the political and economic spectrum when it was revealed that the program — initially projected to help up to 400,000 of the most distressed borrowers — had closed exactly 25 loans since its inception.

The logic behind Hope For Homeowners sounded simple enough. It was inspired by a Depression-era entity, the Home Owners’ Loan Corporation, that helped more than a million Americans stay in their homes. Homeowners stuck with ballooning mortgage payments and declining home values could apply for a new, fixed-rate mortgage backed by the Federal Housing Administration. The Department of Housing and Urban Development allocated $29.5 million in start-up costs to cover training and development for the program. To date, a little more than half that amount has actually been spent. What happened?

Illustration by: Matt Mahurin

“Basically, the incentives are wrong for every category of participant,” said Julia Gordon, senior policy counsel at the non-profit Center for Responsible Lending. For starters, it wasn’t cheap to participate. Homeowners had to pay hefty fees and insurance premiums. In addition, a provision designed to discourage house-flipping required homeowners to share, on a sliding scale, between 50 and 100 percent of appreciated equity built up in the home for the first five years. After five years, homeowners would have to turn over 50 percent of that equity, no matter how far into the future they kept the house.

For their part, lenders were required to lower the principle, referred to as “taking a haircut” in industry jargon. Many of these at- or near-default mortgages also had junior liens on them, often in the form of home equity loans. Hope For Homeowners would wipe out those lienholders entirely. Since the plan was wholly voluntary, lenders were under no obligation to take a loss on the loan. As a result, the vast majority took a wait-and-see approach.

The biggest stumbling block, though, was that of securitization. The majority of subprime mortgages were packaged into securities, and the agencies that manage those securities were loathe to enact loan modifications that could lead to lawsuits against them. Technically, a servicing company is free to do what it needs to do to protect investor dollars. However, if the servicer thought taking the HFH “haircut” was the better option while the investor wanted to foreclose and hope for the best, a messy legal battle could ensue, and no one wanted to be the test case.

“What seems to be happening is the servicers are saying ‘I know foreclosure is bad for everybody but my agreement permits it,’ so it’s the default option,” said Alan Mallach, nonresident senior fellow at the Brookings Institution.

Housing policy experts say the program probably wasn’t helped by the decision to put it under the umbrella of the Federal Housing Authority. “The FHA definitely does not move quickly,” said Sharon Price, director of policy for the housing advocacy group National Housing Conference. Marrying HFH to existing FHA programs turned out to be much more complicated than planned, to the extent that the agency ended up having to build the initiative’s infrastructure nearly from scratch.

“What happened was once we got to the details, this program was so different it really forced the FHA folks — who were pretty thinly staffed — to create a whole new infrastructure,” said the Center for Responsible Lending’s Gordon. “It wasn’t as efficient as one might have theoretically surmised.” This alone would have slowed down implementation, but the directive couldn’t have come at a worse time for the FHA.

When the subprime sector took off earlier this decade, the FHA had found itself increasingly on the margins. Formerly the go-to lender for borrowers with tarnished credit histories, the agency found itself competing against behemoths like Countrywide and IndyMac. Its limited menu of fixed-rate loans seemed less attractive to homebuyers than the exotic, interest-only, adjustable or deferred payment plans the private sector offered, and the FHA’s market share slid.

That trend reversed abruptly when the subprime mortgage market imploded. Last year, the FHA suddenly had to juggle a whopping 161.2 percent increase in applications over 2007. “If Hope For Homeowners actually took off, they’d be swamped,” said Alan Mallach.

Last week, House Financial Services Committee chair Rep. Barney Frank (D-Mass.) pledged to figure out what went wrong, and a series of tweaks to the program has been green-lighted by the financial committee and awaits full House approval. This piece of on-deck legislation dials back the required premiums and equity-sharing measures, and decreases the loss-taking required of lenders. Another provision gives legal immunity to loan servicers who modify loans.

Some say it’s not enough. American Enterprise Institute resident fellow Alex Pollock suggests taking HFH out of the FHA and creating a separate entity. “What they did in the 30s and what I would have preferred would have been a stand-alone entity.” Pollock said. “You’d have had a much more energetic program with a higher probability of success if it was set up as a thing in and of itself.”

Alan Mallach takes it a step further, suggesting that this new division could be responsible for all of the mortgage-related programs, infusions and investments the government has become involved — some would say entangled — in over the past several months. “What we need is a single mechanism for whenever the government finds itself controlling a mortgage,” he said.

Both agree that such a plan is politically unpalatable, though, because it requires at the outset an implicit acknowledgement that the current mortgage problems are going to be with us for a long time to come. Even for a government that has gobbled up substantial amounts of soured assets, that admission might be too much to swallow.

Martha C. White is a freelance journalist in New York. She regularly writes about finance and the economy.