A foreclosed home in Winchester, Va. (Jay Mallin/ZUMA Press)

Mortgage giant Fannie Mae’s recent announcement that it will give homeowners facing foreclosure the chance to stay in their properties as renters for as long as a year is the latest aggressive move by the government to help troubled borrowers and tenants avoid being evicted. But as past efforts to stem the foreclosure crisis have already shown, even well-intentioned programs haven’t managed to reach significant numbers of people in peril – meaning any new approach faces a tough road ahead.

Image by: Matt Mahurin

The problem has been particularly widespread surrounding a provision in the law, called the Helping Families Save their Homes Act, that allows for borrowers with Section 8 affordable housing vouchers the option to also stay in their residences when their landlord is in foreclosure. Some tenants who call their state or local housing authorities in Massachusetts and Connecticut after a foreclosure eviction notice are mistakenly told they have to move, noted Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Better training of housing authority staff would help fix the situation, she said.

“Even with well-intentioned policies, there’s a disconnect between a good idea put into law, and what really happens on the street,” Liben said. “We see that disconnect on the ground, all the time.”

Despite anti-foreclosure initiatives by the government and lenders, the housing crisis has continued to worsen. Foreclosure notices totaled a record high of nearly 938,000 in just the third quarter of this year, according to RealtyTrac, an online foreclosure database. The Center for Responsible Lending predicts a total of 9 million foreclosures by 2012. Vacant and abandoned foreclosed properties are adding to neighborhood blight problems. Renters increasingly have become caught as innocent bystanders, evicted often without notice when their landlord faces foreclosure.

The new federal protections are supposed to address that. But in some cases, tenants in foreclosed homes either can’t reach real estate agents in charge of selling the properties to let them know they want to continue renting, or they get incorrect information from agents and think their only option is to move out immediately, said Shelley White, litigation director at New Haven Legal Assistance in Connecticut. In some instances, law firms send misleading letters that imply a financial incentive to move, known as cash for keys, is a renters’ only option, she said.

“We’re definitely seeing a lot of problems with tenants that just get notes from Realtors that say the bank has foreclosed on your property, and it’s time to get out,” Wright said.

The difficulties in outreach to tenants comes as the government continues expanding options and assistance to borrowers and renters dealing with foreclosure. In addition to the new federal law, the Treasury Department plans soon to rollout its plan encouraging more short sales by offering financial incentives to lenders and borrowers. In a short sale, a homeowner sells his home for less than the amount owed on the mortgage, and lenders forgive the remaining loan balance.

Both Fannie and Freddie Mac earlier this year began allowing qualified tenants in foreclosed homes under their control to sign month-to-month leases. Freddie Mac also started offering former owners of foreclosed homes the month-to-month lease option. Last week, Fannie announced its new policy, which significantly expands on the idea, allowing some owners who didn’t qualify for a loan modification and can’t afford their mortgage  the option of staying on in their homes. The owner would voluntarily turn over the property to Fannie in a “deed for lease” transaction, instead of going through a lengthy foreclosure process. The former owners in exchange would be given the option to rent back their homes for at least a year. Unlike in a short sale, their credit is unlikely to take a hit because of the transaction. And even investors may be eligible, meaning they would turn over their properties to Fannie, but their tenants would have the option to remain.

“This is huge,” said Dean Baker, co-director of the Center for Economic and Policy Research, who proposed a similar own to rent idea when the financial crisis first hit two years ago.

Baker would prefer that Fannie’s new policy extend the the rent-back period even further, to five or 10 years. But, overall, Baker said Fannie’s program addresses the problem of growing numbers of vacant properties, and represents a shift to promoting rental policies as a foreclosure solution. “You’re guaranteed a year, and that gives you some stability and a chance to plan ahead,” he said.

He and others also described Fannie’s new program as a big step forward over some efforts currently in place to help renters in foreclosed homes.

Fannie Mae, for example, already gives renters in foreclosed homes the option to continue renting on a month-to-month basis, or to accept a cash for keys offer. According to Fannie’s data, the financial help has been a far more popular option. Since January, it has tallied 3,500 cash for keys agreements, and 300 signed leases. Fannie Mae spokesperson Amy Bonitatibus said the program was set up to offer both choices to renters. It is open to all tenants of Fannie Mae-owned properties, but she had no information on specifically how many tenants had been approached with offers.

The small number of leases signed isn’t really surprising, said Danilo Pelletiere, research director for the National Low Income Housing Coalition. The options to renters were offered post-foreclosure, by which time some tenants may have decided to make other living arrangements. Cash for keys can be a more attractive option than a month to month lease. The new federal tenant protection law also overlapped with Fannie’s program, so some tenants may not have felt a need to sign leases, he said.

Pelletiere and other advocates said they have much higher expectations for Fannie’s new approach for former owners. A deed for lease transaction can happen far more quickly than a foreclosure, and having a longer-term lease will be more attractive to many people. Fannie also has hired a national property management company to handle the new program, while its existing rental initiative for tenants uses local real estate agents and property managers.

“Because of the way it’s designed, it should do a much better job,” Pelletiere said. “That makes it much more likely that we’ll see a national response. It provides a way for Fannie to be proactive and to get to the property earlier. And it costs less than getting someone out of a home and foreclosing on them.”

Alan Mallach, a senior fellow at the National Housing Institute and the Brookings Institution, agreed. “What’s interesting will be to look at how many people this new policy affects,” Mallach said. “I think it will be significant.”

Pelletiere said he also found some encouragement in early results from Freddie Mac’s program earlier this year to rent back properties to former owners of foreclosed homes on a month by month basis. According to Freddie Mac’s figures, almost 12,000 units entered its portfolio of foreclosed homes between April and October. In 70 percent of cases, a borrower is working on a mortgage loan modification, leasing the home back, or accepting cash for keys. In another 27 percent of cases, the property was vacant by the time Freddie Mac took it over. In three to four percent of cases, an owner or renter faced eviction. Of those occupants who signed leases, two-thirds were owner occupants and one-third were tenants. Spokesman Brad German said he had no further breakdown of the numbers.

The long-held belief has been that owners would decline to become renters again, so having more owners than renters sign rental leases is an encouraging sign for Fannie’s new program, Pelletiere said.

Still, he and others noted the government wouldn’t be prompted to move toward a more aggressive rental policy if a greater number of loan modifications were successful. A recent report by the Congressional Oversight Panel for the government’s taxpayer-funded bailout program criticized the progress being made under the administration’s Making Home Affordable program, saying that in a best case scenario it would prevent fewer than half of expected foreclosures.

As foreclosure notices pile up, troubled tenants and borrowers don’t always understand they might be eligible for help, or they don’t know who to contact to apply for programs, or they just give up and leave upon a foreclosure – even in cases where they have new federal laws and programs intended to avoid evictions. To Liben, the Massachusetts housing attorney, one constant of the housing crisis has been that some people “get lost in the shuffle.” She’s waiting to see if that will finally change.

Illustration by: Matt Mahurin

Did poor and minority borrowers cause the housing crisis?

That seemed to be the consensus from the fight over the failed $700 billion bailout bill. As Congress and the Treasury Dept. debated how to fix the mortgage mess, the battle over what caused it took hold.

A prime suspect soon emerged: The government forced banks, lenders and Fannie Mae and Freddie Mac to make loans in poor neighborhoods to meet affordable housing goals and regulations. The loans went bad, setting off the market meltdown.

Illustration by: Matt Mahurin

As a measure of how widespread that idea became, House Republicans revolted at an plan to give 20 percent of any government profits from the sale of toxic mortgage securities to affordable housing groups — asserting that ACORN and others like it caused the problem in the first place.

On Sunday, as it reported on the bailout bill negotiations in Congress, Fox News continually explained that ACORN and other community groups pushed for government regulations that caused the foreclosure crisis, citing this Wall Street Journal editorial as a source.

In the end, the proposal for money for housing groups was dropped, confirming that most lawmakers probably agreed with that theory — which has taken hold on the Internet, in conservative circles and in the business press. Last week, Investor’s Business Daily ran a front page story: “How a Clinton-era Rule Rewrite Made Subprime Crisis Inevitable.”

The only problem with all this: it’s completely wrong.
Neither the Community Reinvestment Act — the law most cited as the culprit — nor other affordable housing goals set by the government forced Fannie, Freddie or any other lender to make loans they didn’t want to. The lure of the subprime market was high yields and healthy profit margins — it’s as simple as that.

“The rest is a lie — and it’s industry propaganda,” said William Brennan, director of the Home Defense Program of the Atlanta Legal Aid Society, who, in 1991, began raising the alarm over predatory lending in poor neighborhoods. “It’s also racist.”
Popular belief now holds that government regulators ordered Fannie and Freddie to buy more loans made to low-income borrowers, and that housing advocates applauded the agencies’ move to enter the subprime market. In fact, the exact opposite is true, Brennan said.

He was among many advocates, back in 2000, who warned that subprime loans were dangerous and decried Fannie and Freddie’s decisions. By purchasing subprime mortgage-backed securities, the two agencies ended up providing capital to predatory lenders — leading to the foreclosures of borrowers Brennan and others saw in increasing numbers coming to them for help.

It makes no sense that housing advocates would have pressured the agencies. They were stuck with cleaning up Fannie and Freddie’s mess.
“They weren’t forced to do it,” Brennan said of Fannie and Freddie’s entry into subprime. “They wanted to do it. They were looking at raising their profit margins; and they wanted to please their shareholders.”
Everyone’s pointing fingers at Fannie and Freddie now because it’s convenient — they are down and out, seized by the government and they can’t defend themselves, said Guy Cecala, publisher of Inside Mortgage Finance, which follows the subprime industry. It’s all part of larger search for villains in a saga where everyone is guilty, he said.
“Basically, everybody’s rewriting history now,” Cecala said. “One thing that’s difficult is that there is no villain when everyone can be blamed.”
To Gregory Squires, a sociologist at George Washington University who studies banking practices, the motivation in the blame game is more nefarious. “My guess is that there are some observers out there who view any targeted effort to serve under-served communities as problematic,” Squires said, “and are quick to point to such initiatives today to try to explain away our problems. Better to point to low-income blacks than high-income [white] executives, perhaps.”
The main initiative usually cited is the Community Reinvestment Act, a 1977 law that required banks to provide credit to the communities they served. The law was an attempt to offset years of redlining in poor neighborhoods and in minority communities, some of which were middle-to-high income, that had been cut off from conventional credit. In the late 1980s and mid-1990s, the law was strengthened so that banks pursuing mergers or takeovers had to show their compliance with the CRA to get federal approval.
In recent months, the idea that the CRA caused the housing crisis took hold, as proponents of the theory argued that lenders were forced to make bad loans to poor borrowers to meet their CRA requirements. That expanded into blaming the poor and minority borrowers, and the community organizers who helped them:

“I always listen to Mark Levin while making Friday night dinner … Funnily enough, he has explained just what it is community organizers do. Advocating, for instance, for affordable housing for the poor — the poor who traditionally rent, because they are bad loan risks. The day that reasoning by banks was junked as “racist,” was the day this crisis became a possibility.,” – Lisa Schiffren, NRO.

But despite its current portrayal as a burdensome regulation, CRA rules were always viewed as loose guidelines within the industry, said Cecala, of Inside Mortgage Finance. Banks were routinely found in compliance with the CRA, and an insider joke among bankers was that you’d have to mug a disabled, elderly, minority homeowner to lose your outstanding CRA rating, Cecala said.
Beyond that, as the housing boom grew, so did the number of unregulated mortgage lenders, who made the bulk of subprime loans and who didn’t even have to comply with CRA rules, said John Taylor, president of the National Community Reinvestment Coalition, which represents housing and community development groups. Some 75 percent of subprime loans were made by independent mortgage banks and lenders not covered by the CRA, he said.
Taylor’s group met with Federal Reserve Chairman Ben Bernanke last week, and he was “aghast” that the CRA was being fingered as a culprit, Taylor said.
“People see an opportunity here, because the economy’s in trouble,” Taylor said. ” The easiest thing to say is, ‘Oh, it was all those poor people.’ It’s easier to try to shift the focus, and to blame the victims and blame the government.”
Banks that were making CRA loans profited from them, and they had few complaints, said Squires of George Washington. If they had tried to sell high-rate subprime loans and count them toward their CRA goals, it wouldn’t have worked.

“The CRA explicitly calls for safe and sound lending,” Squires said. “It does not call for lenders to engage in riskier lending than they would normally practice. A few years ago, both the Fed and Treasury conducted studies which found that CRA-related lending was profitable. If a lender is making bad loans, or a compliance officer is encouraging a lender to do so, neither party understands the CRA. That is not the fault of the legislation — but of those who do not understand it.”

When it comes to Fannie and Freddie, there’s also a lot that’s been misunderstood.

The two agencies were created by Congress but privately run, until their takeover. They’ve always had dual missions — to serve their shareholders and increase homeownership.

Like the CRA rules, requirements for either agency to provide affordable housing were pretty loose, Cecala said. At the end of the year, both agencies usually would meet their goals by purchasing some loans for multi-family dwellings, he said. In 2004, the agency that regulated their housing efforts, the U.S. Dept. of Housing and Urban Development, informed both entities they needed to increase affordable housing efforts, with the mortgage market so strong.

But HUD never told Fannie and Freddie to jump into the subprime market. Both chose to dive into subprime mortgage securities, and the purpose wasn’t to satisfy regulators — it was to increase market share, Cecala said. Afterward, they asked HUD if some of the securities they purchased could count toward their affordable housing goals. HUD agreed.

Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals. They continued to buy loans made to multi-family dwellings, as in the past, to satisfy regulators.

Despite claims to the contrary, the two did not rely, for the most part, on subprime securities to meet their regulator’s goals. In any case, the majority of subprime loans were refinancings, which wouldn’t have counted anyway.

“Everybody and their dog had refinanced their prime-rate mortgage” by 2003, Cecala said. And there was no way to make money except by aggressively moving into subprime — meaning it was a business decision by Fannie and Freddie, not a government-mandated one.

The arguments over who caused the crisis go beyond politics alone.

In the last two decades, non-profit community development groups across the country have been making strides in helping increase home ownership among under-served populations – but not through subprime lending. Groups like Manna, Inc. in Washington counseled homeowners through Homebuyer’s Clubs, a support group for borrowers that helped them to clean up credit problems, save for a downpayment and prepare for homeownership.

The default rate on Manna’s prime, fixed-rate loans is zero. There are streets in Washington’s tough Anacostia neighborhood, once abandoned and dangerous, that have been rebuilt entirely by Manna, one house at a time. Banks like working with these groups because it’s profitable for them while it increases homeownership.

That all this success could become sullied by partisanship and finger-pointing worries many housing advocates. “The facts don’t support the people who are trying to undermine fair lending,” NCRC’s Taylor said.

But in the bitter politics of bailing out, the search for a scapegoat is only likely to continue.