Aid to the Unemployed Facing Foreclosure: Too Little, Too Late?
Rep. Barney Frank (D-Mass.) and President Obama have proposals to help unemployed homeowners facing foreclosure. (Zuma Press)
Sandra Monroe-Olcott of the Montclare neighborhood of Chicago is in the same position as hundreds of thousands of Americans. She lost her job on April 1, 2008. She applied for unemployment insurance — $804 every two weeks — and immediately started searching for another position. Her husband, now 74, had stopped working and receives Social Security. Her household also includes her elderly father and her son, until recently unemployed and now earning $4.30 an hour as a part-time waiter. The government benefits would tide the family over until she found a new position, she thought. But she never found one.
[Economy1] At the end of March, she received her last unemployment insurance check, becoming one of the million 99ers who have exhausted federal and state benefits. The family went into survival mode. They sold their car, their truck and all of their jewelry except for their wedding bands. They cashed in their insurance policies and 401k. Still, the bills kept coming.
“When that lifeline was cut, so was the mortgage payment,” Monroe-Olcott said. “Last month I used my credit card to take a cash advance to pay my mortgage, knowing that the interest rate on a cash advance is very high, and not knowing how I am going to pay it when the bill arrives. But I was desperate and scared, since I already received an ‘Intent to Foreclose’ letter. I have sold everything I possibly could to make it this far.
“There is nothing else left worth anything. I even rented out the garage, but that person also became unemployed and couldn’t afford the rent. The bank asked me if I would consider selling the home. There are five properties for sale on my block and [they] have been for sale for two years. If I could manage to sell my home” — she laughed — “it would sell for what I owe the bank. Then where would I live? [I would have] no income to pay the rent, even if the landlord overlooked my bad credit check.”
Monroe-Olcott’s predicament is governed by the fundamental equation of the economic crisis: Unemployment drives foreclosure, and the two are jointly destroying middle-class wealth as the effects of the recession linger on. The Obama administration’s efforts to help such homeowners thus far have faltered, failing to put a dent in the wave of home losses. Two new programs are specifically designed to help unemployed people undergoing foreclosure, like Monroe-Olcott. But for many, it might be too little, too late.
This week, the Home Affordable Modification Program — the administration’s flagship effort to help homeowners by letting them refinance for lower monthly mortgage payments and thereby avoid foreclosure — reported dismal numbers. In recent months, the program has kicked out far more homeowners than it has helped. It has completed only 346,000 modifications — though it initially set its sights on three million.
As Mike Konczal of the Roosevelt Institute argues, loan modification generally increases the loan balance by capitalizing the fees to alter the mortgage, leaving homeowners even deeper underwater. An analysis by state regulators shows that 70 percent of mortgage modifications bump up the size of the loan. Just 120 HAMP modifications since March have included principal reduction, according to a report by the Office of the Comptroller of the Currency and Office of Thrift Supervision released on Wednesday. Testifying before the Senate Finance Committee, Neil Barofsky, special inspector general for the Troubled Asset Relief Program, said the HAMP program “risks being remembered not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals and meager results.”
Worse, the Obama administration’s foreclosure proposals have done little to aid the more than a million Americans who are both unemployed and undergoing foreclosure proceedings, since reducing monthly mortgage payments does little for borrowers who have no income. The vast majority of homeowners in foreclosure have suffered some sort of “income shock,” most often due to unemployment or underemployment. HAMP reports that 58 percent of its applicants cite unemployment as the primary reason for foreclosure. And a recent study by economists at the Federal Reserve shows that four in five subprime mortgage holders who default do so due to income loss.
But this week, the Obama administration is moving on two little-noticed provisions that finally address the crisis of unemployed homeowners facing foreclosure and possibly enact more effective measures than mortgage modification. On Wednesday, President Obama gave final approval for the $1.5 billion Hardest Hit Fund, proposed this winter to help homeowners in the states most impacted by the unemployment and housing crises. The states — at first just California, Nevada, Arizona, Michigan and Florida — have already come up with “innovative” proposals to keep homeowners in homes using federal funds. Now, the federal government will give them hundreds of millions to enact them. The measures include cramdown, or principal reduction, cited as the most effective method to staunch foreclosure; and pools of money to help foreclosed families pay arrears. And some states will give unemployed homeowners like Monroe-Olcott low-interest loans to help make mortgage payments.
A similar measure is also in the financial regulatory reform bill, currently being completed in conference committee and expected to be finished by July 4. Rep. Barney Frank (D-Mass.) has requested that the final bill include a House provision providing low-interest loans to the unemployed facing foreclosure. The provision is modeled after Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Program, or HEMAP, which has successfully helped 43,000 unemployed mortgage-holders. The $3 billion national program would offer unemployed homeowners low-interest loans for up to $50,000, funded from the Troubled Asset Relief Program, to help them pay their mortgages for up to two years until they find jobs. Homeowners would make low payments to the Department of Housing and Urban Development during the spell of joblessness, and then repay the government after finding work.
The fate of the proposal remained uncertain as of the time of this article’s writing. Frank said that rather than taking the funds out of TARP, he might assess very big banks and hedge funds. “I think it would be a good thing for some of those very highly paid employees to contribute some money to help people losing their homes because in many cases it was their misjudgments that led to that happening,” Frank told reporters on Wednesday.
Housing experts say that the provisions should help those hardest hit by the employment and housing crises, but worry that the damage might be done. Already, banks have foreclosed on millions of homes, and 5.5 million more are in the foreclosure pipeline. Barry Zigas, the director of housing policy for the Consumer Federation of America, lauded the efforts but noted that they have the hallmark of most of the administration’s policies towards the unemployed facing housing loss: They do not address the root cause of being underwater or unemployed.
“The new [Wall Street reform bill’s] initiative plus the 10 states that the administration has provided money to for pilot programs to help the unemployed facing foreclosure will be helpful. But ultimately, it is job creation — genuine job creation — and the extension of unemployment benefits that will help the situation,” he said. “If we loan [unemployed persons facing foreclosure] money and then don’t do anything to help them get jobs, it is nothing but a temporary palliative.”
Unemployment is not expected to decline anytime soon, meaning that even if the government gives homeowners facing foreclosure two-year loans, some percentage will still be members of the long-term unemployed, often underwater on their mortgages, in 2012 or later. And the Obama administration thus far has not thrown its weight behind two provisions that might make actual dents in the housing crisis writ large: cramdown and right-to-rent, which would give homeowners the right to rent their home after defaulting on their mortgage.
In the meantime, those out of luck continue to wait. Out of options, Monroe-Olcott decided to apply for a loan modification from her bank. (Her mortgage has been sold between banks five times.) “If we are foreclosed on, I could put my father and husband in a nursing home, and me and my son will walk the streets. There is no welfare if you own a home, and you can’t get welfare if you do not have a permanent address!” She expects to hear back from Chase in 60 to 90 days.