Flickr: respres

As bank-owned foreclosed properties pile up across the country, from abandoned houses in hard-hit neighborhoods to empty big box retail stores in failed strip malls, the fight over holding someone responsible for the brick and mortar mess left behind by the mortgage crisis continues to heat up.

More than two years into the crisis, local authorities still are slapping banks, servicers and speculators with fines ranging from $30,000 to even $90,000 for ignoring orders to take care of foreclosed and vacant properties under their control. The continuing punitive measures come as servicers already find themselves under fire for failing to complete more loan modifications under the Obama administration’s Making Home Affordable program – an effort that includes $75 billion in taxpayer money as incentives for the lending industry to rework loans. And it also comes as some realtors and lenders are mounting challenges to local anti-blight ordinances, and promoting the use of a mortgage database to track down servicers. Some housing advocates fear the industry will go beyond lobbying for the use of its mortgage system to push for getting rid of local vacant property laws altogether.

Illustration by: Matt Mahurin

The end result: Some of the same servicers the Obama administration is urging to complete more loan modifications still are walking away entirely from vandalized homes, or failing to fix broken windows, get rid of junked cars, clear trash, repair damaged roofs and gutters, or even demolish a condemned house, all of which can be violations of local housing codes. And housing courts keep hearing persistent arguments from servicers that they’re merely temporary custodians who can’t alienate investors by spending money to bring properties up to code.

“They may think it’s unfair, but the law provides that if you have ownership of a property, you take care of it,” said Cleveland Housing Court Judge Raymond Pianka, who regularly fines lenders $5,000 a day for properties that don’t comply with city codes. “There’s no provision to exempt corporations. I’m not going to treat them any differently than the individual property owners who come into my courtroom in wheelchairs and walkers.”

And while the lending industry contends its working more cooperatively than ever with local authorities, not everyone sees it that way.

“For every one vacant property owner who wants to work with the local government, there are five other property owners who are gaming the system,” said Joseph Schilling, a Virginia Tech urban affairs professor and co-founder of the National Vacant Properties Campaign. “My sense is the industry is also overwhelmed, almost as much as the code departments, and properties still fall through the cracks.”

Controversies over vacant properties are one sign of how the aftermath of the mortgage crisis may be as complicated to address as the initial waves of foreclosures themselves.

As TWI reported recently, the volume of REOs, or bank-owned foreclosures, is growing at an alarming rate, exacerbating the foreclosure crisis by sticking hard-hit neighborhoods with vacant and sometimes vandalized homes that drive down property values. REOs are foreclosed properties that lenders take back after they don’t sell at foreclosure auctions or sheriff’s sales. They keep the homes in inventory until they can be sold again.

RealtyTrac, an online foreclosure database, predicts that REOs will total 1.5 million this year, up from 160,000 just a few years ago. And a significant percentage of those REOs still haven’t been listed for sale. That means a glut of bank-owned foreclosed homes remains in limbo in many communities. Some banks hire property managers, but others let houses fall into disrepair. Neighborhoods in Cleveland, Detroit, and other cities with weaker housing markets have been stung by growing blight from REOs. In once-hot areas, like Atlanta, “zombie” subdivisions that were half-built and then abandoned mar the suburbs.

Speculators who buy REOs in bulk over the Internet, then fail to fix them up or abandoned them, have added to the crisis. And more loan defaults are expected, with 9 million foreclosures predicted by 2012, according to the Center for Responsible Lending. On top of all this, the bust in commercial real estate means communities also are increasingly stuck with empty big box retail stores, closed-down car dealerships, and vacant strip malls – more blight, and more problems.

For its part, however, the lending industry contends that it’s doing more than ever to solve the problem, stepping up to work more closely with state and local governments, and promoting a mortgage database that local officials can use to track down servicers and notify them of violations.

“There was a disconnect a few years ago, but we’re moving forward,” said Robert Klein, CEO of Safeguard Properties, a company that maintains vacant homes nationwide for mortgage servicers and banks. “There’s been tremendous progress made between code enforcement officers and lenders and servicers around the country. I think we’re all on the same page now.”

Empty houses with code violations resulting in stiff fines usually are the result of years of previous neglect, or cases in which servicers can’t be found to be notified of problems, he said. That situation is happening with far less frequency than in the past.  “The $90,000 fines are an exception to the rule,” Klein said.

But in remarks to a recent Mortgage Bankers Association mortgage servicing conference that continue to be passed around on housing and community development listerves, Cary Sternberg of American Home Mortgage in Irving, Tex., went further. Sternberg, the firm’s senior vice president of Real Estate Owned (RE0) properties, contended that servicers increasingly are caught “in the cross hairs of disgruntled and cash-strapped local governments” looking to drum up revenue. The local governments often don’t understand the legal and other constraints under with servicers operate when it comes to REOs, he said.

“They need to look for ways to keep their cities going,” Sternberg said. “It’s a difficult problem to deal with and servicers like us are dealing with cities and municipalities all over.”

In Chula Vista, Calif., Realtors and lenders complained this summer that the city’s landmark anti-blight ordinance, which includes fined of up to $1,000 for lenders that ignore code violations, was driving away new business. Chula Vista’s 2007 ordinance became a national model, with more than 200 other communities adopting similar rules. The city has issued a total of $1.3 million in fines. Realtors asked the city to lessen fines and give firms more time to repair properties. The city is reviewing possible changes to the ordinance.

While servicers and code enforcers have made real progress sharing information through the mortgage database, the huge volume of REOs and continuing foreclosures continues to swamp the resources of everyone involved, Schilling said.

And in some places, problems run even deeper..

“From my experience, servicing of properties in the inner city, particularly in African-American neighborhoods is either non-existent or erratic,” said Kermit Lind, a Cleveland State University law professor who specializes in housing and foreclosure issues. And, he added, “servicers have testified under oath that they receive instructions to stop maintaining properties and walk away. Servicers have complained that they cannot afford to bring their properties up to code and still make money selling them, and that their investors will not allow them to comply with local laws.”

Lind had little sympathy for the plight of servicers, noting archly that “any reasonable person should see that compliance with local building and housing codes protecting the health, safety and welfare of taxpaying neighbors should be subordinated to the duties and responsibilities of servicing and pooling agreements concocted on Wall Street.”

But Christopher Oswald, a lobbyist with the Mortgage Bankers Association, which launched the mortgage database project, said lenders hit with huge fines only face additional obstacles getting foreclosed properties on the market and into the hands of new owners. Communities may once have needed to levy punitive fines to get the attention of servicers, but that problem has been addressed by the mortgage database, known as MERS, he said.

The industry database was expanded to allow its use by local governments. Enter an address, and up pops the name and contact information for a servicer or property management firm.

“We’re both after the same thing – to make sure the properties are maintained,” Oswald said.

The MBA introduced database in a handful of pilot cities more than a year ago, and the effort has been so successful the group plans to expand it nationally, he said.

Schilling said the industry outreach has been particularly successful in the West, in fast growth markets, and in some individual cities such Dayton, Ohio. But there are still problems elsewhere. At a recent housing conference in Kansas City, Schilling said he “got an earful” from housing and code officials throughout the state about how hard it was to find and work with mortgage servicers.

The mortgage database itself has drawbacks. It covers many, but not all, mortgage loans. It has no data at all on commercial real estate owners. And in some cases, a property contact shifts once a house moves from foreclosure to an REO. “There are gaps,” Schilling said.

An even bigger concern is that the lending industry will lobby state and local governments not just to use the database, but to also get rid of their local vacant property ordinances. Communities still need those regulations on the books as a powerful tool to make sure servicers and lenders take care of their properties, Schilling said.

The MBA isn’t actively lobbying against any anti-blight measures, Oswald said. But it makes sense for some towns to realize they may not need anti-blight ordinances if they can track down owners through the database instead. Communities can then avoid having to issue large fines that may delay transferring properties to new owners, he said.

“Anything standing in the way of getting servicers to put properties back on the market would be of concern to us, and should be of concern to local code officials too,” Oswald said.

Some local officials already have plenty of concerns about getting foreclosed homes back on track.

In Cleveland, Judge Pianka said some banks and servicers finally are catching on, showing up in his courtroom to answer to violations and repair properties. He’ll often forgive the big fines if a firm cleans up its property. (Court records show Pianka reduced a $30,000 fine for U.S. Bank to $3,000, after the bank brought a house into compliance.) But a recent court docket also gave a glimpse of continuing disputes, from the speculator from Dubai, who bought six properties, sight unseen, off Craigslist, and hasn’t fixed them up, to a real estate company that purchased REO worth only $1,000, and already has racked up $50,000 in fines.

Pianka recently spoke to a conference of property management contractors sponsored by Safeguard, showing photographs of graffiti-scarred, abandoned homes, and letting the lending industry know he’ll hold them accountable for their foreclosures. Klein, of Safeguard, said the judge’s talk was well-received – another small step in a continuing battle over cleaning up after the foreclosure mess.

They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. They could continue to pay for a while longer but instead are walking away. “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com.

Along those lines, I keep hearing radio ads for consumer credit counseling firms that have a different tone than in the past. Companies that negotiate down debts with credit card firms on behalf of consumers once touted themselves as a helping hand for a troubled borrower drowning in debt. The ads would sympathize with the worries of a consumer saddled with bills, and offer to help lift that burden. The latest ads, however, complain about lenders getting billions of dollars in taxpayer bailout money — and they suggest that lenders are somehow obligated to reduce consumer debt. The tone has changed significantly. The ads now say consumers deserve to be bailed out by these bailed out institutions. There’s no hint of the personal responsibility involved in piling up a mountain of debt.

Is this a good thing? Are banks getting what they deserve for overextending credit? I don’t think it’s as simple as that. Here’s the borrower in Streitfeld’s story, explaining her reasoning for defaulting:

Melissa Birks is being stalked. Her cellphone keeps ringing, always from a caller marked “unknown.” She says she knows it is her credit card company wondering why she stopped making payments. Ms. Birks, who owes $28,830, has nothing to say.

Ms. Birks, 43, readily admits that no one forced her to use her cards. “Some people are good with money,” she said. “I was stupid.”

Still, just about everyone made mistakes during the boom — regulators, Congress, Wall Street. If Bank of America got a bailout for making bad loans, Ms. Birks figured, she deserved a bailout for accepting them.

In previous downturns, Ms. Birks’ only recourse would have been a debt management plan, where she would restructure her payments with the help of a counselor, or bankruptcy. Now there is a third option: debt settlement. This means going on strike until the lender accepts a partial payment.

Ms. Birks asked Bank of America about a settlement this spring. Since her account was up to date, she was told she didn’t qualify. She stopped paying, the bank started calling.

When Bank of America finally got her on the phone, it agreed for the first time to drastically reduce her interest rate. She did not take the deal, but considered it progress.

Neither side comes out of this looking good.

Calculated Risk, citing Streitfeld’s piece, wonders once again why financial literacy isn’t being emphasized more these days:

Streitfeld is writing about the growing wave of ruthless credit card defaults, but this also raises question about the credit card industry in general. Why aren’t consumers being educated on the dangers of not paying off their credit card balance each month? Maybe that will be a good role for the new consumer financial protection agency.

But it’s not a given that agency will be created. And even if it is, it may be too late for people like Melissa Birks, debtors who refuse to answer calls from banks  about the thousands of dollars they owe. Until there’s some sort of consensus reached on the responsibilities of both consumers and banks to settle debts in a post-bailout world, the new morality of mounting consumer debt may become the option of the ruthless default.

Hopes were high for the program as one possible solution to the economic crisis. It was supposed to be a way to slow down the increasing pace of foreclosures.

As Housing Wire reports, some data is now available on the program’s progress so far. It would be fair to say that a celebration hardly is in order.

In its first two weeks, 42 applications were filed for the program. Not a single one was accepted. The problem seems to be with third-party investors in mortgage-backed securities, who won’t take any losses on their investments. From Housing Wire:

The problem, however, may not be lenders, who say they’re more than willing to begin processing the loans. Instead, the problem sits with third-party investors that have thus far proven unwilling to take the minimum 10 percent haircut required to put borrowers into the program, plus an upfront premium payment–losses are actually far greater for investors who participate, given that the 10 percent figure is based on a current appraisal, and not original LTV.

John Sorgenfrei, president of Florida-based Assurance Home Loan, Inc., said he receives calls from eight to 10 borrowers daily about participation in the program. For the time being, he has been forced to make them wait, as no investors so far have bought into the program.

“I wish I could say we have something in the works,” he said. “We’re waiting for the investors to decide whether it’s going to be a third-party participation or just exclusively held for the lenders.”

Robert Paduano, managing director at Allegro Funding Corp., licensed to operate in 24 states and signed up on the H4H list, also said in an interview that the hold-up on the program has resulted from investors unwilling to accept rewrites on existing loans.

“The [H4H] program is a joke,” he said. “It’s not going to materialize into what we had hoped for because most lenders are unable or unwilling to write down the principal balance to 90 percent because their investors won’t let them.”

There’s a growing list of banks trying to do loan modifications, with JPMorgan, Bank of America, and IndyMac among them. And there’s the program being put together by the Treasury Dept. and the Federal Deposit Insurance Corp. All of them rely on the voluntary participation of lenders and investors, and depend on their willingness to take a losses in return for government guarantees.

Judging by the early returns of the FHA program, and the difficulty in getting other loan modifications through, it’s clear that investors are in the driver’s seat — and that they’re not willing to take any hits.

In the middle of a budget battle in the early 1990s, James Carville, President Bill Clinton’s political adviser, once remarked that he hoped to come back in the next life as the bond market, because it was all-powerful. These days the choice might be investors in toxic mortgage-backed securities, unwilling to give up their double-digit returns — and, apparently, far enough removed from the fluttering of bank-owned signs on millions of empty houses where people once tried to carve out a life, to even care.

For example, here’s one such idea today, in The Wall Street Journal. It’s called a Shared Appreciation Mortgage, or SAM. Lenders would take a loss as they wrote down a borrower’s mortgage debt. But should the home appreciate in value eventually, lenders would then share in the gains. The notion was described by four economics and law professors, Andrew Caplin, Thomas Cooley, Noel Cunningham and Mitchell Engler. Here’s more:

A homeowner unable to support payments on a house purchased for $200,000 that today is worth only $150,000 might be offered a write-down of up to $50,000. But this would not be a free lunch.

With the SAM, once the value began appreciating above $150,000, the mortgage holders would be due their share. The details of the write-down and the appreciation sharing could be tailored to different circumstances. But one way to give lenders a share of the upside would be to pay back some of the write-down if the house is later sold, in the scenario above, for more than $150,000. This is a model in which both parties benefit, preventing default while giving future taxpayers a fighting chance at some real upside to the investment we’re forcing on them.

The authors contend the government needs to tackle a bold solution, and this would fit that bill.

So far, the government has been making bold moves — but only when it comes to rescuing banks. Will it do the same for homeowners? The SAM authors say there’s precedent for the government to act:

Almost 75 years ago, in the depths of the Great Depression, the nation faced a housing market collapse even more brutal than today. The federal government responded with a strategy that allowed homeowners to keep their homes and kept the bottom from falling out of the real-estate market. Unprecedented at the time, the 30-year fixed rate mortgage has since become the gold standard in markets around the world.

Today, facing a similar collapse, the federal government needs to be equally bold. SAMs are the new deal in housing that our children need.

After introducing the idea in Tuesday’s debate, a summary of the proposal on McCain’s Website noted that lenders taking part must recognize the losses they’ve already suffered – which led people to believe lenders would be taking a haircut on the loans in return for $300 billion in government money to rewrite them.

Not so.

The MCain folks removed that line, Politico said, and made it clear that lenders will be asked nothing in return for getting taxpayer money to refinance troubled loans.

McCain is selling his plan as a bold and fresh move: The government buys bad mortgages and renegotiates them on lower terms, so people can stay in their houses. But the reviews from economists haven’t been good. The plan, they say, lets the same lenders that made risky loans that helped lead to this crisis totally off the hook. There’s no moral hazard here. Lenders don’t share in the pain.

From Brad DeLong:

The McCain plan is:

• Take $300 billion.
• Pay double current market value to banks that have troubled mortgages on their books, thus:
  • Give a present of $100 billion to the bankers who made the loans.
  • Acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.

There’s a big difference here: Democrats want to prevent depression and support the financial markets by investing taxpayer money in banks with troubled assets. Republicans want to give taxpayers money away to the shareholders and managers of banks with troubled assets.

As the details of the plan are sinking in, it’s becoming clear that McCain has essentially torpedoed the program the government is now trying to roll out — the one included in the mortgage rescue bill passed this summer, in which the Federal Housing Admin. guarantees mortgages that lenders refinance after taking a loss on the loans.

The program is voluntary. Imagine you’re a lender. You could swallow a 10 or 15 percent loss on your loan and take part in the FHA program, or you could look at McCain’s plan and ask yourself: Why should I? Why not wait to see McCain wins, and then not take any loss? Under his plan, the loss just shifts to the taxpayers.

So just as the program is being put into place this month, and just in the crucial period as the FHA is trying to get it going, the McCain idea comes along.

Sure, the FHA plan wasn’t going to be able to help millions of homeowners — 400,000 or so was the estimate — but it was better than nothing. And it it made clear that since we’re all to blame in this mess, everybody pays. Lenders take a loss. Homeowners have to return any profits from the future sale of their homes to the government.

As Housing Wire reports today, the government is trying to expand the program as best it can to include more homeowners. Now it has yet another obstacle to overcome — the notion for lenders that there might be something better down the pike.

McCain wanted to distinguish himself with this plan. But if he really wanted to be a maverick, he could have chosen another route besides sinking a modest rescue effort already in place — that’s just an insult.

McCain could have done what he talks about so much in his campaign: Stand up to special interests. He could have come to Washington when he suspended his campaign during the bailout negotiations, and he could have faced down the lending industry and said: Enough.

The government now owns or controls $5 trillion worth of mortgages, but it can’t renegotiate many of them because they are sliced and diced into pieces and sold around the globe, and servicers say they can’t force all those investors to agree to modificiations.

Too bad, McCain could have said. He could have taken the radical step of telling servicers they had to modify the loans — after taking a loss on them.

Imagine the tumult that would have followed. The lending industry would be screaming foul. Conservatives would be appalled. McCain would have to rally lawmakers to get on board, and probably, he couldn’t.

But the idea would be put on the table — and a way of breaking a huge logjam that has prevented loan modifications from happening would be in play, thanks to McCain’s leadership. Maybe lawmakers and policymakers would have followed his lead, and thought of ways to encourage lenders to participate, with either sanctions or incentives. He would have done something to help, and, as the crisis worsened, more people might have gotten on board.

On Thursday, as my son’s preschool class walked down the street to the fire station for a field trip, the substitute teacher strolling behind me was talking about the mortgage crisis. Her sister’s loan was underwater and she couldn’t sell her house. The government passed a rescue plan this summer, she said, but did you know that it’s going to take a really long time to rewrite any mortgages?

Well, yes it will. Because it’s increasingly clear to all of us that there’s not a fast or simple way out of this. There’s no magic bullet from the government. There’s no rescue plan that will make a difference right away.

There’s just a lot of pain ahead, and no easy way out. And don’t let McCain, or any other politician, tell you anything different.

On Friday, Georgetown University credit expert Adam Levitin argued on TWI that the change would be the best way to help homeowners in any rescue of the financial system. But the lending industry has long opposed it, and Congress always has taken their side. Even in a bill that spends taxpayer money to bail lenders out, they still get their way — at least as the latest version now stands.

The lending industry contends the change would only add to the costs of foreclosure and would increase mortgate rates for everyone.

But last week, Levitin told me another reason the industry might not want the change. As foreclosures have increased, the industry has come under greater scrutiny for the fees it packs on to the loans of borrowers with foreclosed homes in bankruptcy.

Apparently, while no one was looking, the industry has regularly added all sorts of unnecessary, and even illegal, fees to a bankrupt borrower’s balance — leading to claims that banks and servicers are taking advantage of people who filed Chapter 13 bankruptcies to try to save their homes.

One study found that questionable fees were added to half of all mortgage loans of borrowers in bankruptcy. In one case now under investigation, Wells Fargo added a total of $24,000 in fees to a borrower’s loan.

Levitin said that in Jefferson Parish, La., a lender charged a $250 inspection fee on one loan. The trouble was, the house was underwater. Not the loan, the actual house. Yet the lender still charged for an inspection.

Lenders might not have wanted judges modifying loans in bankruptcy not just because of the extra cost, but because of the additional scrutiny, Levitin said. Those judges might have taken a closer look at fees being charged and could have put an end to that gravy train.

But now that the measure isn’t going to make it in the bailout bill, it looks like lenders don’t have to worry about someone looking over their shoulders in bankruptcy court.

Six thousand American families are due to lose their homes in foreclosure today.

Many more American families are going to be grist for the foreclosure machine unless Congress acts to help them. But, as of today, it appears that any bailout of the financial institutions that are now in trouble after years of reckless, making predatory loans is not going to include help for homeowners.

Illustration by: Matt Mahurin

The basis of the bailout plans now under discussion is the government’s purchase of hundreds of billions of dollars in mortgage-backed securities, or MBS. Purchasing MBS alone, however, will not solve the foreclosure crisis because it will not give the government the legal ability to modify loans and keep families in their homes.

This is because of the complicated structure of most of the troubled loans. Many are held by securitization pools, each of which was carved up into highly complex securities and sold to tens of thousands of investors around the globe.

MBS are debt securities — essentially bonds. A bond is a right to a steam of payments. It is not a right to direct management decisions. So an MBS holder has no more right to direct the management of the mortgage loans than corporate bondholders have to direct the management of the corporation.

The decision to do loan modifications rests with the mortgage servicer, which manages the mortgages on behalf of the MBS holders. For most securitization deals, the servicer’s instructions cannot be changed without the consent of two-thirds of the MBS holders.

So, in order to modify the underlying mortgages, the government would have to reassemble more than two-thirds of the tens of thousands of pieces of each of the carved up MBS deals. Many pieces have themselves been pooled and securitized, sometimes multiple times, which makes the government’s Humpty-Dumpty problem even more difficult.

The task is further complicated because many borrowers took out second or third mortgages, the pieces of which also have to be reassembled by the government in order to prevent foreclosure.

Even if the government could reassemble the pieces needed to change the servicer’s instructions, it could still not modify the mortgage loans without the consent of all MBS holders earning income from the affected MBS. So bailing out financial institutions is unlikely to provide relief to the millions of Americans facing foreclosure.

To date, efforts to help financial distressed homeowners keep their homes have relied largely on the financial services industry’s voluntary efforts. These have been ineffective at best — and harmful at worst. It seems no longer possible to trust the industry to set the terms of the public policy debate about the mortgage crisis.

First, the financial industry insisted that there would be no mortgage foreclosure crisis. It was wrong. Then it insisted the crisis would be “contained,” with minimal harm to homeowners and the economy. Wrong again. Today, as foreclosures continue to dwarf the number of voluntary loan modifications, threatening the entire U.S. economy in the process, the industry is still arguing that a limited solution — Federal Housing Admin.-guaranteed refinancings — will take care of the problem.

Given the industry’s track record, can the public gamble on their assurances — especially when mortgage servicers, who make the decisions about how to manage loans, often have a financial incentive to foreclose on distressed mortgages rather than modify them?

The only way to ensure that help is available for homeowners is to supplement the Wall Street bailout with help for consumers. One answer might be bankruptcy relief for mortgage debt, which has been the primary mechanism for resolving consumer financial distress for more than a century.

The bankruptcy system, however, is incapable of handling the current home mortgage crisis because of the special treatment due residential mortgages. Unlike virtually every other type of debt, mortgages on single-family primary residences may not be modified in bankruptcy.

This means that a family can write down credit card debt, car loans, medical bills, payday loans, loans on yachts, jewelry, and household appliances, even mortgages on vacation homes or rental property. But if they cannot make their original single-family home mortgage payments, right down to the last penny, they lose their home.

Permitting modification of mortgages in bankruptcy does not require the lenders’ consent. Bankruptcy provides a solution when lenders are unwilling, or incapable, of making a deal with homeowners. Bankruptcy relief would help homeowners keep their homes with no cost to taxpayers, would not be available for speculators, would spread losses between lenders and homeowners, and would be immediately available — unlike government programs that can take months to set up.

The financial services industry has argued that permitting bankruptcy modification of mortgages would result in a constriction of mortgage credit, higher prices for consumers, and instability in the market. These are serious concerns. But the industry has presented no evidence to support this, and all available research indicates that there would be little effect on mortgage credit availability or cost.

Widespread financial distress among homeowners lies at the base of this financial crisis. Without resolving this, a bailout of financial institutions will not right the economy. A bailout of the financial services industry could come with an explicit price tag: relief for homeowners now and serious regulatory reform later. Otherwise, the financial crisis will continue — which means Congress is just signing a blank check.

Adam J. Levitin is an associate professor of law at Georgetown University Law Center, where he teaches bankruptcy and credit transactions.

It would not be such a bad idea for Wall Street to do the same now.

There are plenty of quality community colleges, for example, and there’s probably still time to sign up for a course each week in understanding investments.

Tanta at Calculated Risk – a mortgage broker by trade – has some additional thoughts on this. She’s among a growing number of people calling for the bailout to include some punitive measures for Wall Street, or some provisions to help homeowners.

One would be to allow bankruptcy judges to modify mortgage loans — so the borrower would owe the fair-market value on the home, not the inflated loan amount.

Here’s Tanta:

What I really really like is the idea of subjecting CEOs to the same petty humiliation everyone else gets treated to. I suggest that for every separate asset these CEOs sell to the government, they be required to write a Hardship Letter over a 1010 warning (that’s a reference to the statute forbidding lying in order to get a loan) explaining why they acquired or originated this asset to begin with, what’s really wrong with it in detail, what they have learned from this experience, and what steps they are taking to make sure it never happens again.

Furthermore, the Treasury Dept. will empanel a committee of the oldest, most traditional, and bitterest mortgage-loan underwriters — preferably those downsized to make way for automated underwriting systems — to review these letters and opine on their acceptability.

Look for more calls for Wall Street to take some hits in return for $700 billion from taxpayers.

But some people are going to come out of this mess just fine, The New York Times says. And guess who that might be?

Departing chief executives Daniel Mudd at Fannie Mae and Freddie Mac’s Richard Syron could leave with lucrative pay packages totaling milions of dollars. All this despite the fact that the companies they headed failed so spectacularly the government had to step in.

From The Times:

Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

It’s nice to know that Syron, in the midst of a meltdown of his company that threatened the stability of the housing market and of the U.S. economy itself, took the time to redo his contract to ensure he would be enriched should Freddie Mac fail. It’s so inspring to have someone at the top looking out solely for himself while mortgage rates were going up and millions of Americans faced losing their homes.

That little tactic, in and of itself, should give the government more cause to step in and say: No way. We own the place now – and we no longer have to put up big salaries for no-talent executives to enjoy cushy retirements while everyone else pays for their mistakes.

Here’s hoping the government makes an example of these two — and quickly — before top executives at all those failing banks get the same idea and start rewriting their own employment contracts.

When the foreclosure crisis began to heat up last fall, troubled borrowers got this advice: Call your lender and try to work things out. The Bush administration led the way on this, unveiling its Hope Now program — a hotline to connect borrowers with mortgage counselors and servicers to re-do loans on easier terms.

President George W. Bush and Treasury Secretary Henry M. Paulson Jr. touted the approach as a private sector-led effort to help homeowners who were falling behind on their payments. Hotlines and efforts like Hope Now sprung up at the state level as well.

But since its inception, Hope Now has run into trouble — criticized for serving too few people with too little results. Borrowers complained they couldn’t get through to counselors or servicers, and Bush didn’t help the situation by giving out the wrong hotline number at a news conference. Servicers seemed reluctant to modify large numbers of loans, and most recently, counselors say, some are agreeing only to two or three-year repayment plans, instead of restructuring the loans into 30-year, fixed-rate mortgages.

Illustration by: Matt Mahurin

Hope Now, in the meantime, regularly issues optimistic progress reports as foreclosures continue to soar — filings rose by 55 percent in July, compared to a year earlier — and the housing market shows no signs of stabilizing.

At this point, both industry experts and housing counselors are questioning whether voluntary workouts are a useful solution to the housing crisis — and whether there’s any solution at all. It’s time to acknowledge that workouts are a band-aid effort at best, they say, a way for government and the lending industry to show they are doing something about the crisis, without actually doing much.

Workouts don’t work, in this view, both because borrowers are reluctant to seek help from lenders, refusing to open mail from them for fear it’s a foreclosure notice, and because servicers who negotiate workouts have little financial incentive or staff to help significant numbers of them anyway.

The problems with loan restructurings aren’t just about a fight between borrowers and lenders. The failure to secure a large volume of restructurings speaks directly to the entrenched, structural problems in the mortgage market that prevent simple or quick cures for foreclosures.

Servicers earn money by collecting fees, not from setting up restructurings. This gives them little reason to do more of them. Borrowers and lenders are at odds in the process, a roadblock to getting anything done. Hope Now, for example, counts among its members the American Securitization Forum, which represents financial companies that buy and sell mortgage securities, and which tells counselors to avoid across-the-board restructurings.

Hope Now is promoted by the government, but run by private industry, and lenders and servicers vary in their restructuring decisions. Some are big enough to absorb foreclosure losses and move on, giving them little impetus to accept restructurings. Smaller lenders, or those looking to buy a little time in the hopes the market will pick up again soon, are motivated to agree to only two-or-three year agreements — and then go after the property again if home values rise.

In the meantime, the government is pinning its latest hopes on the mortgage rescue bill that goes into effect next month, hoping lenders will voluntarily agree to take losses and refinance loans backed by Federal Housing Administration insurance — something they could have been doing all along, even without the new legislation.

“Why aren’t there more loan modifications? Because lenders are reluctant to do them, except as a last resort,” said Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md., publication that follows the industry. “Hope Now is something the government had to do to show it was doing something about the crisis. I think they’re hanging on to it as a public-relations gesture. It’s as much about p.r. as it is about having an impact on the problem.”

Consider how loan modifications are reported. Hope Now announced recently that it prevented a record number of foreclosures in July, completing more than 192,000 workouts. But the group doesn’t break down details of the modifications. So it’s unclear how many were restructured loans at lower rates and how many involved repayment plans that just stretched payments out over a longer period of time.

By contrast, in a new research paper, Alan White, a University of Valparaiso law professor and mortgage-industry expert, examined 4,300 loan modifications in subprime loan pools from July 2007 through June 2008. The workouts were completed by Hope Now and by other groups.

White found that virtually none of the modifications resulted in a reduction of the loan principal, and only about half reduced the interest rate and monthly payment.

Hope Now is under “a hell of a lot of pressure” from both the Bush administration and from Democrats like Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to come up with results, Cecala said. But lenders don’t see things the same way, and instead believe that loan modifications are likely to fail in the end, making them not worth the effort.

“Don’t think for a minute that anyone in the mortgage industry, or anyone who knows anything about this, thinks workouts are some sort of panacea,” Cecala explained. “The feeling in the mortgage industry is that there’s no silver bullet and there’s no easy way to address this crisis. They’re just going to have to muddle through it somehow.”