Tavis Smiley interviews Barack Obama in October 2007 (YouTube: BarackObamadotcom)

As the housing market began booming in the mid-2000s, Wells Fargo & Co. teamed up with prominent African American commentator and PBS talk show host Tavis Smiley and financial author Kelvin Boston, the host of “Moneywise,” a multicultural financial affairs show, to host something called “Wealth Building” seminars in black neighborhoods.

Smiley was the keynote speaker, and the big draw, according to Boston and Keith Corbett, executive vice president of the Center for Responsible Lending, who attended two of the seminars. Smiley would charge up the audience — and rattle the Wells Fargo executives in attendance — by launching into a story about how he hated banks, and how they used to refuse to lend him money for his real estate projects in Compton, Calif., and elsewhere. After Hurricane Katrina, Smiley also emphasized the importance of building assets and wealth, saying those who had done so were able to leave New Orleans, while people with nothing had to stay behind, Boston said.

Illustration by: Matt Mahurin

“My spiel was the financial planning process, how you want to be able to save and invest for the future, and to have a plan of action,” Boston said. “Then Tavis talked about his experiences with the banks, and how people should be thinking about some real estate.”

The seminars in some cities drew standing room only crowds, with numerous Wells Fargo representatives on hand, seated at carrels to meet one-on-one with potential borrowers who lined up after the speeches, which were usually held in hotels. The free, day-long events were heavily advertised in the black media, and launched in eight cities, including Baltimore, Chicago, Richmond, Va., and San Francisco.

But what appeared on the surface as a way to help black borrowers build wealth was actually just the opposite, according to a little-noticed explanation of the “Wealth Building” seminar strategy, contained in a lawsuit recently filed by Illinois Attorney General Lisa Madigan.

Wells’ plan for the seminars all along was to target black borrowers for higher-cost subprime mortgages, not for wealth-building, the suit charged. And the seminars were a part of the bank’s overall illegal and discriminatory practice of steering black and Hispanic borrowers into riskier and more expensive loans, the suit said.

“According to a former Wells Fargo Home Mortgage employee, one of these ‘Wealth Building’ seminars held in Maryland was planned for an audience that would be virtually all African American,” the suit said. “The plan for the seminar was for Wells Fargo Home Mortgage employees to talk about subprime mortgages, although they were directed by Wells Fargo Home Mortgage to use the term ‘alternative lending’ when marketing these products.”

The former employee, who is white, was scheduled to speak at the seminar, but was told by a manager that she was “too white,” and that only black employees could make presentations, the suit said.

Wells Fargo, one of the nation’s largest mortgage lenders and a recipient of $25 billion in government bailout money, has denied all the charges in the Illinois suit, as well as other allegations of unfair lending. The bank did not respond to requests for comment on the seminars. Smiley, an author and advocate who hosts the late night talk show, “Tavis Smiley,” and who organizes the State of the Black Union symposiums each year, also declined comment.

Corbett pointed out that Wells’ outreach to the minority community through the seminars wasn’t unusual. Lenders sponsoring financial literacy sessions, holding wealth building seminars, or contributing to local minority advocacy organizations, became a common marketing strategy as the subprime market grew. Some of the efforts were genuine, aimed at finding new customers in minority neighborhoods once deprived of credit. But sometimes they were used instead as a cover to push predatory loans, Corbett said.

“The wealth building seminars are certainly needed,” Corbett said. “But, if, in fact, Wells was selling bad products out of them, it was totally wrong.”

Boston, for his part, described himself as the small player in the seminars, giving an opening talk before Smiley went on. Boston said he spoke in general terms about the need to save money and to invest. Neither he nor Smiley ever mentioned or discussed subprime loans, he said.

“Basically we were just speakers for hire,” Boston said. “We didn’t have any role or any control over what else happened. The main point is that we were not involved in any of their discussions or in anything they sold.”

Corbett said that after the speakers finished, bank employees and other financial experts were offering credit checks, real estate counseling, and other kinds of assistance. Corbett said he also believes some employees were signing up people for loan pre-approvals, on the spot, though he couldn’t be sure of what kind of loans they were. He said attendees lined up to talk to the Wells employees in both events. “If they weren’t actually selling loans, they were setting up borrowers for the kill,”  Corbett said.

Once their speeches were over, however, Boston said he and Smiley  had nothing to do with the workshops and counseling. He said he and Smiley together did about 15 seminars over a period of about two years. He declined to comment on how much he or Smiley were paid.

In 2005, before the subprime crisis, Boston said, the main worry in the black community over mortgage lending was the banks were lagging behind in their lending to minority neighborhoods. He said expressed his concerns about this to Wells Fargo. Smiley, he said, also later raised questions about subprime lending tactics with the bank. “Tavis definitely had some dealings with them on this issue,” Boston said.

Nonetheless, in hindsight and with the collapse of the subprime mortgage market, Boston said he has second thoughts about participating in the seminars.

“Were we probably used? We probably were,” he said. “If I had the chance to do it over again, would I do it in a different manner? Probably.”

“You look back now and you feel for the homeowner who could have qualified for a better mortgage and got the costly type of mortgage. That concerns me a lot, not just for Wells Fargo, but for everybody out there, Citigroup, Countrywide … they were all doing the same events.”

But at the time, Boston said, having a major bank doing outreach in the black community was considered an encouraging development, after so many years of redlining and restricted access to credit. “We all thought at the time that we were doing a positive thing,” he said.

Boston said he quit doing the seminars after his contract ended two years ago. Smiley, he said, continued to work with Wells Fargo, particularly on his annual State of the Black Union symposiums. On his Website, Smiley recently posted a statement regarding Wells Fargo that said, “in this economic climate, we continue to be reminded every day that there is no perfect company.”

Smiley said in the statement that his relationship with Wells began in 2005, as part of the bank’s  “commitment to increase financial literacy in the African American community.” He said that “the partnership with Wells Fargo focused on building personal wealth, which for most Americans begins with buying a house.”

According to the statement, Smiley also has had partnerships with other companies, but has never served as a spokesperson or representative for any of them, including Wells Fargo. The statement also said Wells Fargo will no longer be one of the sponsors of his Black State of the Union event in 2010, although the bank sponsored the event as recently as last spring.

“Given the fact that Wells Fargo has been an industry leader, they have partnered with many African American and Latino national civil rights organizations on various community initiatives,” the statement said.

The Illinois lawsuit against Wells is one of many such actions winding their way through the court system around the country, offering more details of alleged discriminatory tactics by lenders during the height of the subprime boom. As TWI reported last week, housing advocates call these lawsuits the “smoking guns” of the housing crisis, providing what they see as proof that lenders deliberately targeted minorities for high-rate and risky subprime mortgages, while white borrowers with similar incomes and credit scores received lower-cost loans.

In a city of Baltimore lawsuit against Wells, former employees charged that Wells Fargo loan officers referred to minority borrowers as “mud people” and called subprime mortgages “ghetto loans.” But some prominent black bloggers find the “wealth building” seminars just as egregious, and question why Smiley, Boston, and anyone else who participated in them hasn’t been called on further to account for their actions.

“If Tavis Smiley was white, Wells Fargo and ‘Ghetto Loans’ would be front page news,” wrote Genma Stringer Holmes, a Nashville, Tenn., business owner and blogger who has blasted out several posts on the seminars.

Holmes said Smiley should speak out more against discriminatory subprime lending practices – but he hasn’t been forced to, because the black media has been silent on the issue, she said. The scandal that remains is that the ads and seminars targeted the most vulnerable members of black community, according to Holmes. “People who follow Tavis will follow him off a cliff,” Holmes said.

Boston said he still does seminars and presentations pushing wealth building, but he focuses on avoiding foreclosures and helping with loan modifications. He recently wrapped up work on an upcoming show on helping homeowners facing foreclosures, he said.

This story has been updated for clarity.

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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.

You can’t pin this one on Republicans alone. It’s true that Sen. Johnny Isakson (R-Ga.) came up with the idea to revitalize the proposal, which first surfaced earlier this year in negotiations over the stimulus package – -but Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is a co-sponsor. Coincidentally, I’m sure, Dodd is in the midst of a tough re-election battle. I’d imagine offering a $15,000 credit for first-time homebuyers and eliminating any income ceilings so even wealthy people are eligible probably will lpay pretty well in Greenwich.

First, a little background. As TWI reported recently, Congress approved the $8,000 tax credit as a way to jumpstart the housing market, and HUD came up with a plan to allow homebuyers to access the credit immediately for downpayment money. This seemed slightly problematic to many, given the long history of fraud and abuse associated with downpayment assistance schemes for government-backed loans. Also, some wondered why the government was helping people who couldn’t afford downpayments to buy houses, given that having no skin in the game leads to defaults, which was supposed to be one of the lessons learned from the mortgage crisis.

To its credit, HUD came out with revised guidelines for the program, requiring borrowers to put down some of their own money for the downpayment, along with accessing the credit. And it issued stern warnings to third-party firms that might try to offer bridge loans for the credits at high interest rates.

That should have ended it. But then lawmakers came up with the new idea to increase the size of the credit and open it to everyone. Here’s how Clusterstock summarizes it:

The government continues its desperate effort to make the cost of dwelling more expensive. There’s already an $8,000 homebuyer tax credit, but it’s obviously not done enough, so Senators Johnny Isaacson and Christopher Dodd are proposing to up it to $15,000.

And, perhaps more importantly, they’re eliminating the income requirements. Under the previous tax credit, a couple had to have a combined income of less than $150,000. Now any upper-middle class homebuyer is eligible, and hopefully this will get the McMansion sales going again.

Yes, that’s just what America needs – more McMansions.

It’s true that interest rates are jumping and the housing market isn’t exactly soaring. And the Obama administration’s homeowner rescue plan isn’t quite taking off, either. Those are serious problems that need to be addressed. Is handing out a $15,000 tax credit the best way to accomplish that?

If this tax credit expansion passes, look for someone to suggest a way to let borrowers turn it into downpayment money. Then they can buy bigger houses than they probably can afford.

We might not have learned much from the current foreclosure crisis, but at least the builders of all those McMansions will be happy.

Most striking is that Hope for Homeowners has attracted unexpected backers: Investors who had refused to consider the program’s requirement that they forgive some of a borrower’s mortgage balance if the home is worth less than is owed, known as being underwater, are now trumpeting that provision.

“Institutional investors that own securities backed by mortgages are extremely keen to write down principal in exchange for the borrower refinancing into a Hope for Homeowners loan,” said Tom Deutsch, deputy executive director of the industry group American Securitization Forum.

Investors that were previously unwilling to write down the value of their loans are increasingly on board with the practice — anything to get those loans off the books. A bird in the hand is worth two with a high probability of default, as they say. But there’s something amiss here. If investors believed that they would maximize their return on troubled loans by reducing principle, they would. That is, if they thought that by writing down the principle on a loan they would increase the odds of payment by enough to make the haircut worthwhile, then it would make sense for them to go ahead and do so. And if they were already doing so, then there would be no need for this program.

But clearly there is a need. Investors are only ready to write down principle if that allows them to shed default risk — which means they don’t think that writedowns lead to large reductions in default risk. And they’re probably right. Under this program, there are new borrowers waiting to pick up the loans because Federal Housing Administration is authorized to insure them — up to $300 billion. It kind of looks as though the government is working hard to absorb up to $300 billion in mortgage loan losses from various investors.

Hope for Homeowners seems primarily geared toward providing hope to investors, rather than homeowners. Given the extent to which unemployment is driving defaults in the current climate, a serious effort to stem foreclosures would focus on generous extensions of unemployment benefits, to the exclusion of most everything else.

Freire’s site is only one node in a network of grassroots Tea Party sites, which are protesting the mortgage rescue plan and the more general “recent trend of fiscal recklessness in government.” The main Washington event will be a rally in front of the White House on Friday, at noon.

Among the ideas that people pitched while Freire was working:

- An appearance from Joe “the Plumber” Wurzelbacher. (He plans on showing up as a reporter for PajamasTV and then commenting on the event on Sean Hannity’s Fox News show.)

- A garbage bag that tea partiers will fill with tea bags. Protestors might write the names of programs they don’t like on the tea bags.

- Doing the garbage bag idea, but with cardboard boxes.

- A cover of “Take This Job and Shove It,” with new lyrics that would attack the stimulus package.

- Getting people in Revolutionary War garb to skeet shoot tea bags.

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With credit remaining tight and banks continuing to restrict lending, it’s been up to the government to keep the mortgage markets moving. And a major player these days is the Federal Housing Administration, a Depression-era insurer of mortgage loans specifically tapped to take on a much larger role as savior of the housing sector and rescuer of homeowners facing foreclosure.

But with the FHA’s share of the mortgage market expected to grow to nearly 50 percent, the agency finds itself facing the same dilemma as its parent, the Department of Housing and Urban Development. Both were shunted aside during the Bush Administration. Like HUD, the FHA doesn’t have enough staff or even up-to-date technology to handle its expanded role. It lowered its loan standards to compete with private lenders during the subprime boom, and problems with fraud continue to plague it, just as it backs more loans than ever.

Illustration by: Matt Mahurin

Even the president of the banking industry’s trade group warned Congress recently that the agency needs to stop predatory lenders from finding their way into FHA lending programs.

Even beyond that, the FHA must turn itself around and operate at its peak, after years of neglect. While the Obama administration tackles the stimulus plan and other urgent problems, government agencies like FHA and HUD, long relegated to the sidelines, are being called on to ramp themselves up and take on greatly expanded tasks. With the financial crisis so severe, the revitalization has to happen immediately – and there’s no Plan B. Getting these agencies back up to speed is an overlooked challenge facing the new White House regime.

Sheila Crowley, president of the National Low Income Housing Coalition, described that challenge as “extraordinary.”

“When you’ve been operating under a belief system that government is the problem and is not helpful, which has been the direction under the Bush Administration, people get demoralized and that makes it harder to get anything done,” she said. “HUD and the FHA have lost a lot of people and they’ve been neglected over the past eight years. There just aren’t enough people left to do everything the government is asking them to do. It’s a pretty hefty assignment to turn them around.”

The view from the private sector isn’t any rosier. “The FHA’s role has been so small until recently that no one’s paid attention to them,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors money management firm and former director of research at the Federal Reserve Bank of Atlanta. “They’ve been seen as sort of the group that licks the bottom of the bowl. So, no, there’s not a lot of confidence that they can suddenly run the show.”

FHA’s troubles were highlighted recently by HUD Assistant Inspector General James Heist, who told a House Financial Services Committee at a hearing earlier this month that “we have had, and continue to have, concerns regarding FHA’s systems and infrastructure to adequately perform its current requirements… FHA may not be able to handle its expanded workload or new programs that require the agency to take on riskier loans than it has had in its portfolio.”

An audit of FHA’s roster of approved appraisers found 3,480 appraisers with expired licenses and 199 with state sanctions for abuses, Heist said. The agency has just one person assigned to work with the states in complying with new national licensing requirements for mortgage brokers and loan officers. Its computers and software date back to the 1970s and 1980s. Despite the availability of commercial, off-the-shelf software, the agency’s process of approving lenders for its programs remains a largely manual task.

Overall, the FHA needs to increase its staff, increase training for its staff, increase the the oversight of its appraisals and underwriting, and improve the way it vets lenders taking part in its programs, Heist said. The number of FHA lenders approved for its programs jumped by 330 percent over the last year, as credit tightened. But the agency still has problems with continuing to allow lenders with past predatory abuses into its programs, he said.

The “integrity and reliability” of the newer lenders is “unproven,” Heist said, and “in light of the aggressive recent history of this (subprime lending) industry, may pose a risk to the program.”

Howard Glaser, a mortgage industry consultant and former Clinton Administration HUD official, was more blunt. While the agency’s share of the mortgage market will soon approach 50 percent, up from just 3 percent 18 months ago, Glaser said, “the FHA does not have the capacity to handle that kind of volume.” He described the FHA in the near future as akin to a $2 trillion insurance company, without any risk controls.

“They’re the only financial corporation of any note in America that lacks a chief risk officer and a chief credit officer,” he said. “It puts probably many billions of taxpayer dollars at risk.”

That risk also came to light when a Business Week investigation found the same subprime lenders that contributed to the mortgage crisis were finding their way into FHA-backed lending programs, with the agency failing to identify and disqualify them. But the track records of those lenders were easily available – in FHA’s own database, noted Brian Chappelle, a former FHA official and industry consultant.

“There’s no question the FHA needs resources, and that there’s been a loss of career staff and institutional knowledge. That’s a given,” Chappelle said. What’s unknown, he added, is whether the FHA can change its culture to handle its expanded role. “If they have the will, they can do it,” he said.

An HUD spokesman said no one was immediately available for comment. HUD said in a written statement to the House Financial Services Committee that it was closely monitoring loan defaults.

FHA’s expanded role in insuring mortgages is a dramatic contrast to its past.

The agency was created as a New Deal program in the 1930s to help struggling Americans buy homes. In the 1960s, it was brought under HUD, with the goal of increasing home ownership by insuring loans made to underserved populations and borrowers with modest incomes. In the last 15 years, its goal has been to reach mostly urban communities that were subject to redlining, said David Berenbaum, executive vice president of the National Community Reinvestment Coalition.

But as the private sector began about a decade ago to move into the subprime market, FHA’s loan share declined. By the height of the subprime boom, in 2006, FHA’s share of the mortgage market had fallen to 2 percent, according to the agency.

At the direction of former HUD Secretary Alphonso Jackson, and with the support of the White House, the FHA began loosening some of its lending standards to compete with the private market, Berenbaum said. Jackson issued a rule allowing more self-policing for lenders in FHA programs, and he supported raising loan limits. Jackson also maintained that HUD had plenty of resources to deal with the foreclosure crisis, and insisted it wouldn’t be that severe, Berenbaum noted. During his tenure, FHA foreclosures and defaults reached record levels.

Jackson resigned last April over a criminal investigation into charges he steered HUD contracts to business associates and friends. HUD Inspector General Kenneth Donohue in 2007 criticized both Jackson and Brian Montgomery, the current FHA commissioner, for pushing to change FHA lending standards.

Montgomery, who has been asked to remain in his position until a new commissioner is chosen, is a longtime Bush loyalist, a former director of advance for the Bush White House, and an advance man for former president George H.W. Bush. He had no prior housing experience. Montgomery’s predecessor, John Weicher, a conservative economist and now a senior fellow at the Hudson Institute, headed the FHA.

Montgomery, however, surprised critics and won praise from both Democrats and Republicans for being an advocate for his agency and for trying to make it more efficient. But he wasn’t able to do enough, Chappelle said. During Weicher’s tenure, the agency “withered,” he said.

As the mortgage crisis worsened during the last year, Congress and the Bush Administration increasingly turned to the FHA to keep the mortgage market going, encouraging borrowers to refinance into stable, government-backed loans, getting lenders to participate and making more changes to increase the number of eligible borrowers. FHA-backed loans generally have lower downpayment and credit score requirements.

The FHA is funded by mortgage insurance premiums paid by borrowers, which go into a fund to cover losses on mortgages the agency insures. Taxpayers would only have to kick in money if the fund fell too low. But Heist warned the fund has been shrinking recently, down some 40 percent over the last year. The $12.9 billion now in the fund comprises 3 percent of mortgages insured by the FHA, a decline from 6.4 percent last year, and just above the 2 percent ratio required by law, Heist said. About 6.5 percent of FHA-backed loans are in default, he said.

Since it was created in 1934, the FHA has never had to ask for government help to cover its losses.

With its market share rising, the government wants the FHA to keep backing new loans and do a large volume of refinancings as well – something that will require a significant amount of new equipment, resources and staff, Berenbaum said. He and other housing advocates, like Crowley, are counting on the Obama administration to come though with those resources and to rebuild the agency.

As Chappelle pointed out, the agency has come full circle, back to its Depression-era roots as the insurer of home loans in difficult times. The dilemma ahead is whether its recent history will keep it from fulfilling that mission.

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Just as troubled borrowers are poised to become the next likely recipients of government help, bailout fatigue seems to have set in.

Since the government began inching toward offering homeowners more help — calling for a holiday foreclosure suspension and launching a plan to streamline mortgage-loan modifications — the anger over bailing out borrowers has been growing. Taxpayers are expressing their frustrations in the blogosphere and in casual conversations.

Illustration by: Matt Mahurin

“Many people are upset,” said Alex Pollock, a former banking industry executive and resident fellow at the pro-business American Enterprise Institute. “They’re saying, ‘I didn’t buy a house I couldn’t afford. I didn’t take out a home equity loan to go on a vacation. Not only am I supposed to struggle to keep paying my mortgage, I’m also expected to pay other people’s mortgages too.’”

Pollock frequently hears such sentiments, despite the record number of homeowners losing their homes because they can’t pay the bills. After The Washington Independent ran a story last week on the eviction of Manassas resident Julio Angulo, whose home had been foreclosed on, a comment on the site complained that Angulo effectively got five and half months of free rent because he refused to move after receiving the eviction notice in July. Why did he buy a house in the first place, the commentator asked. And could he read?

That sort of anger will likely rise as President-elect Barack Obama and some lawmakers push more aggressively to help distressed homeowners.

On “Meet the Press” on Sunday, Obama went further than he has in the past to push for government help, criticizing what he called a lack of urgency by the administration.

“I’m disappointed that we haven’t seen quicker movement on this issue by the administration,” Obama said. “We have said publicly and privately that we want to see a package that helps homeowners not just because it’s good for that particular homeowner; it’s good for the community.”

But that doesn’t necessarily mean such assistance would going over well among most taxpayers. As Pollock noted, polls show taxpayers oppose government bailouts in general, whether for the banking sector or the auto industry. The taxpayers question whether government should take on that kind of responsibility. They’re not likely to feel much differently about homeowners.

That means the Obama administration will need to sell any new assistance plan by emphasizing how rescuing troubled borrowers will help everyone whose retirement packages are shrinking and whose home values are falling.

That won’t be easy. The influential mortgage blog Housing Wire has been swamped by taxpayer resentment toward helping borrowers who aren’t always perceived as deserving of the aid. When Fannie Mae and Freddie Mac announced their foreclosure halt in November, Housing Wire said, emotions bubbled over:

The decision to halt foreclosures also isn’t silencing a growing number of critics who say they’re angry at all of the resources and attention being given to troubled borrowers. At [Housing Wire] in the past few days, we’ve been buried under feedback from lenders and servicers — and even employees at both GSEs [government-sponsored enterprises] too — that have largely expressed frustration at what they see as a bailout of irresponsible borrowers at the expense of responsible ones.

The anger goes beyond industry insiders. Some people who pay their mortgages on time are wondering if they should continue to do so. In the Washington Post, real estate writer Kenneth Harney quoted Rob Chrisman, senior vice president and director of capital markets for Residential Pacific Mortgage in Walnut Creek. Chrisman said he talked with one loan agent who commented that, “All I have to do is stop making mortgage payments, and I can get a 3 percent rate? Sweet! Who needs a mortgage broker?”

The emotion was summed up perfectly by San Francisco columnist Kathleen Pender, who asked, “Are You an Idiot to Keep Paying Your Mortgage?”

As the Obama administration works to put together a package to stem foreclosures and help troubled homeowners, the kind of resentment pinpointed by Pender might fester into the kind of anger that was directed at the Big Three auto industry executives who flew into Washington on private jets to beg for bailout money. No one wants to help out someone who seems to have gamed the system. On Monday, the nation’s top bank regulator, Comptroller of the Currency John Dugan, said new data show that more than half of all recent loan modifications have fallen delinquent again, raising more questions about the wisdom of bailing out borrowers.

Dugan, however, also acknowledged he couldn’t judge the quality of the loan modifications — whether they substantially reduced loan amounts or just strung borrowers out on repayment plans.

Housing advocates have argued that loan modifications can work if they reduce the borrower’s overall debt and bring monthly payments to more affordable levels.

Despite all the obstacles, the public still could get behind a rescue package, housing advocates insist. It all depends on how it’s sold.

On its website, the Center for Responsible Lending measured the spillover effect from foreclosures: An additional 41 million families in surrounding neighborhoods would see ee home prices fall an average of $8,667, for a total loss of $352 billion.

And even that figure “doesn’t count the decreased buying power that [number] represents, and the suppressing impact that has on consumer demand,” said senior policy counsel Kathleen Keest.

She noted that Credit Suisse on Monday predicted a surprisingly high 8.1 million foreclosures by the end of 2012, or 16 percent of all households with mortgages. Increasingly, Credit Suisse said, those mortgage failures are moving beyond subprime loans to prime and more upscale borrowers.

Mark Zandi, chief economist at Moody’s Economy.com, told a housing industry forum Monday that he thinks the public will be more sympathetic to the idea of helping homeowners than it might have been in the past, because the link between foreclosures and wider economic pain is becoming more evident. In addition, banks that were bailed out by the government but still refuse to lend have added to public anger.

Angulo’s case serves as an example. He tried to talk to his lender, he said, but he got nowhere. He said he called the lender after he learned his loan payment would rise from $1,400 to $2,600 a month, which he couldn’t afford. The lender told him it couldn’t help, because he wasn’t behind in his mortgage payments. So, Angulo said, he stopped paying them.

Angulo’s lender was Aurora Loan Services, which also serviced the loan. Aurora is a subsidiary of a financial institution with a familiar name: Lehman Bros. The failure of Lehman ignited the Wall Street meltdown that led to the $700 billion rescue package.

The Village Voice last month published a long expose on Aurora, which specialized in selling Alt-A and interest-only mortgages to people with decent credit. The loans usually required no income documentation or downpayment. The Voice characterized Aurora as “the sleazy Lehman Brothers subsidiary” and noted that bad loans originated by Aurora partly led to Lehman’s downfall.

From the Voice:

Thomas Martin, the head of a Washington, D.C.–based company that does investment analysis and has been monitoring Lehman and Aurora over the past three years, says he has received more than 400 consumer complaints from around the country about the two firms.

“To us, it may have been a criminal enterprise from the get-go,” says Martin, whose group is called America’s Watchdog. “They collect fees from the pension funds, which buy these mortgage-backed securities, and then gouge the consumer on the back end. I think Aurora should be put out of business, and they weren’t the only loan servicer doing this stuff.”

Martin says Aurora does a series of questionable things, which result in unfair payments and push consumers toward foreclosure.

The reason a white-shoe firm like Lehman worked with Aurora was simple: Profit.

Again, from the Voice:

Loan companies — especially the shadier ones — were issuing home loans to people who really couldn’t afford them, or under terms that basically guaranteed the buyer would default once the interest rates soared.

Like most streetwise dealers, Lehman took a cut of just about every piece of the transaction all the way down the line. It [and other Wall Street firms] ended up pushing its loan companies to stretch even their flimsy standards and issue weak loans.

But going after lenders won’t be enough. To get the public behind a rescue package, the government needs to put together a loan modification program that heads off the problem before a homeowner falls behind, and doesn’t offer a perverse incentive to stop paying on a mortgage. Any rescue package or loan modification attempt must aim at keeping people in their homes for the long term — not just something that kicks the problem down the road. It’s also well worth exploring ways to offer more rental assistance and housing to people who won’t be able to afford their homes even with a break on their mortgage.

To win wider support, advocates will have to acknowledge the unfairness inherent in any rescue plan. Obama moved in this direction Sunday, explaining that “If my neighbor’s house is on fire, even if they were smoking in the bedroom or leaving the stove on, right now my main incentive is to put out that fire so that it doesn’t spread to my house.”

Everyone pays for foreclosures. The path from the front steps of Angulo’s former townhouse in the working-class complex of Georgetown South in suburban Virginia winds up leading directly to a diminishing 401 (k) plan. A foreclosed house in a neighborhood becomes the cause of that community’s collapsing home values.

There’s plenty of reason for resentment in any rescue plan. Some people who don’t deserve help will get it. People who paid their mortgages on time might feel punished for it. But, as the argument goes, we’re not really bailing out people like Angulo. We’re saving ourselves.

I checked in with Angulo over the past few days, and here is what has happened to him since then.

Angulo planned on going to the Prince William County Winter Shelter Monday night – his only option, with most other shelters full. The shelter is open for drop-ins from 2:30 to 6 p.m. Then it closes for an hour. Angulo would have to go back out in the cold and stand in line until 7 p.m., when the shelter reopens for the night. However, the shelter runs on a first-come, first-serve basis, and it was almost full on Monday. Angulo wasn’t guaranteed a place to stay, even if he stood in line.

Still, he said, it was better than nothing.

But later that afternoon, Angulo’s luck finally changed, just a little. A neighbor returned from work and heard about his plight. The neighbor agreed to rent Angulo a room for two weeks. After that, Angulo said, he plans to return to El Salvador, to be with his family. “I need to rest for a while,” he said.

When I called him last night, he was at the public health clinic in Prince William. The arthritis in his knee, the one he said he had injured, was really hurting him, he said. He doesn’t have health insurance.

Despite everything that has happened to him, Angulo says he’s only staying in El Salvador temporarily. He has lived in the United States for 28 years, he said, and he considers it his home. He still wants to come back, with his family, and someday, buy another house.

Does he still believe in the American Dream?

“Yes, yes,” Angulo said. “I’ll try again.”

He promised to call before he leaves for El Salvador. I’ll keep you updated.

This is supposed to be the season for a break in home foreclosures, a pause in evictions over the holidays.

But it’s not working out that way for everyone. And certainly not for Julio Angulo of suburban Virginia, another victim of a foreclosure machine that seems to be almost unstoppable.

To great fanfare, mortgage giants Fannie Mae and Freddie Mac announced last month they would temporarily halt foreclosures and evictions from Thanksgiving to Jan. 9. One analyst called the move “a giant timeout” to help people stay in their homes while they try to get their loans modified. The decision also avoids the spectacle of two government-controlled finance companies throwing families out on the street at Christmas time.

Illustration by: Matt Mahurin

Days before, Fannie Mae and Freddie Mac unveiled a major rescue plan to streamline modifications of loans to make them more affordable for potentially hundreds of thousands of borrowers. Banks including JPMorgan Chase and Bank of America also suspended foreclosures while trying to restructure troubled homeowner loans.

And Monday, Treasury Secretary Henry Paulson said for the first time that he would consider using money from the $700-billion Troubled Asset Relief Program to help avoid foreclosures.

But nothing seems to shut down the foreclosure machine — at least so far.

Fannie’s and Freddie’s holiday program, for example, applies only to new foreclosures, not those already in the pipeline, which is full. Some 765,558 properties received default notices, or were foreclosed on, during the third quarter, a new record, RealtyTrac figures show. And while the two mortgage giants together own or guarantee $5 trillion of the nation’s mortgages, they don’t hold most of the riskiest subprime loans at the heart of the housing crisis. That means their suspension program is likely to affect only a small percentage of homeowners facing foreclosure.

So on a chilly Monday morning in December, at a complex of several hundred modestly priced townhomes in a working-class area of the city of Manassas in suburban Virginia, it was business as usual. Another foreclosed house. An eviction, yet again. One more former homeowner, saying goodbye.

At 8:40, realtor Keith Elliott Jr. was shuffling through paperwork in his car parked outside a three-level brick townhouse with maroon shutters that was scheduled for a lockout eviction. The owner apparently had refused to leave the premises despite getting a foreclosure notice.

Elliott represents the mortgage company, Aurora Loan Services, and has the job of securing the property after the eviction. He explained that Julio Angulo bought the townhouse in 2005 for $280,000, a price that reflected the peak of the housing boom. The property now is assessed at $225,300.

On July 8, Aurora foreclosed on the house. Shortly after that, Elliot visited the property and made Angulo a $1,500 “cash for keys” offer if he left the property within two weeks, and it was in good condition. Angulo spurned the offer, Elliott said.

During his visit, Elliot said he noticed that the three bedrooms upstairs had key locks, a sign the owner was renting them out.

On this December morning, Elliott was waiting for a contractor from a property management company to show up to change the locks. He was in a somber mood.

“This is one aspect of my job,” Elliott said, “that really does suck.”

At 9:17, Fernando Alves, the locksmith for Safeguard Properties pulled up in his truck. He greeted Elliott, then waited for the sheriff.

Prince William County Sheriff’s Deputy J.M. Zampino arrived some 20 minutes later. He bounded out of his car and walked to the front door of the townhouse. Five sharp knocks followed. “Sheriff’s office,” he bellowed. “Hello?”

Zampino noticed keys hanging from the door knocker. “Looks like someone left some keys for us,” he said.

He unlocked the door and pushed it open.

Standing in from of him was Angulo, 55, wearing blue jeans, a jacket and a baseball cap with an inscription that read “60th Annual Greater Manassas Christmas Parade.”

“How are you doing, sir?” Zampino asked. He explained he was a deputy sheriff.

“I’m waiting for a friend of mine to help me move,” Angulo replied in a soft voice. “Can I have time? How long can I stay here?”

Zampino stepped inside and began to look around, with Angulo following him. The two continued talking. Zampino turned toward the door and announced to Elliot and Alves the locksmith that only Angulo was inside the house. Angulo slowly trailed Zampino as he headed upstairs. “I broke my knee,” he told him.

“You broke your knee? Oh boy,” Zampino replied, sympathetically.

With Zampino and Angulo inside, Alves drilled away to remove the front-door lock and replace it with a new deadlock. He was done in a flash — by 9:42.

Despite the loud drilling noise and the presence of a sherriff’s car outside, neighbors hardly gave the townhouse a second look as they walked by. About half of the 67 properties listed for sale in the complex, called Georgetown South, are foreclosures, Elliott said. Vacant properties with foreclosure signs in front of them sit adjacent to homes with lawns brightly decorated for Christmas.

At 9:44, 10 minutes after arriving, Zampino finished his inspection of the house and stepped outside.

Zampino’s job has taken its toll on some law-enforcement officers. In Cook County, Ill., the sheriff recently refused to evict renters from foreclosed homes in a Chicago neighborhood, citing the need for more legal notice. In Philadelphia, the sheriff suspended foreclosure evictions to allow homeowners and mortgage servicers to work out alternatives.

Zampino said he couldn’t speak for the sheriff in Prince William, but he expected evictions to continue.

“We’re not going to hang up the process in any way,” he said. “We’re just here to do our job. We just keep the peace.”

Two years ago, Zampino did two foreclosure evictions. This year, he’s done “in excess of 100.”

The most difficult cases are ones like Angulo’s, where the former owner remains in the house. “You run into obstacles from time to time,” Zampino explained. “Angry folks … handicapped people with no place to go.”

Asked how Angulo was doing, Zampino paused, then said, “Um … you know.”

Zampino headed back into the house to find Angulo. He told him that the lockout was complete, that all the locks on the doors had been changed and that he had 24 hours to get everything out of the house, or it would be hauled away.

The eviction was officially over, less than a half hour after it began. But Angulo still was allowed to wait a few more hours for his friend to help him move.

Angulo leaned against the wall of the townhouse’s front hallway, still strewn with construction debris, including 2×4s and empty buckets. He constantly worked on the house, he said, trying to fix it up. He spoke quietly in halting English, stopping frequently to keep his emotions in check.

“I tried to talk with the bank, but they wouldn’t help me,” he said. “I got an attorney but he didn’t do anything. I paid him $1,500, but he didn’t do anything.”

He said his troubles began last spring, when he told his renters they had to leave because “they didn’t have their papers.” Both Manassas and Prince William County have law enforcement and zoning efforts that target illegal immigrants.

At the same time, Angulo’s monthly mortgage payment on an adjustable-rate loan jumped from $1,400 a month to $2,600. He earns about $500 a week as a housepainter.

“I didn’t know what happened,” he said. “I got charged. I can’t pay that.”

Aurora Loan Services, which was foreclosing on Angulo’s house, is a subsidiary of the failed Lehman Bros. It specialized in Alt-A loans, which required no documentation or downpayment. The firm still services Alt-A loans.

A month ago, knowing that foreclosure and eviction were coming, Angulo sent his wife and two children, a son, 18, and a daughter, 12, back to their native El Salvador.

Does he have someplace to stay tonight?

He shakes his head.

No.

Does he have someone to help him find a place?

No.

“It’s very hard,” Angulo said. He started to say something else, but couldn’t.

Angulo said he looked for an apartment to rent, but $1,500 a month was too much for him. He hasn’t worked in the past few days because of his knee. He owns a truck, a 1986 Nissan, that doesn’t run very well.

He turned down the cash-for-keys offer, he said, because “I wanted to keep the house.” It was a mess when he bought it, and he put a lot of work into it.

At 10:06, as church bells began ringing throughout the neighborhood, Angulo stepped out into the front yard of his former townhouse, listening to Elliott gently repeat the lockout rules and the need for Angulo to get his belongings out of the dwelling. “I’m sorry for your troubles,” Elliott told him.

Angulo said he was still waiting for his friend with the truck.

At 10:14, Angulo sat down, in the cold, on a rusted patio chair next to a small round table in the townhouse’s tiny front yard. He looked down at his hands. He lifted his head, stared into nowhere, rested his hand on his knee, sighed. He put his head down again.

Zampino, who had gone to his car, returned with some brochures for homeless shelters and social service agencies and gave them to Angulo.

“Sir,” he said, “are you going to be OK?”

Angulo said nothing. He took the brochures.

The church bells still were ringing.

Angulo shivered slightly and glanced at the brochures. Zampino and Elliott went to their cars.

As they drove away, Angulo stayed in his chair, holding the brochures and sometimes glancing up at the sky. Just sitting, outside a house that once was his home.

Tanta also often taught the mainstream media a lesson, calling out reporters for doing lazy or misleading stories. And the fact that she could delve so deeply into a complicated subject and still attract a large audience probably was the biggest lesson of all, especially for newspapers laying off experienced reporters and pushing for shorter stories.

From Calculated Risk’s tribute:

Tanta liked to ferret out the details. She was inquisitive and had a passion for getting the story right. Sometimes she wouldn’t post for a few days, not because she wasn’t feeling well, but because she was reading through volumes of court rulings, or industry data, to get the facts correct. She respected her readers, and people noticed.

Here’s how the New York Times described her influence:

Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.

Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

Tanta’s real name was Doris Dungey, and she most recently lived in Upper Marlboro, Md. Most regular readers never even knew any of that. In the blogosphere she was just Tanta, and everyone who cared about the mortgage meltdown knew her name.