Hooverville, Next Stop

Over the past weekend, I had the pleasure of meeting a lovely middle aged woman named Jane*, while helping some friends of mine fix-up the steal of a deal fixer upper they just purchased. Over the 24 hours of moving things, sanding cabinets, and scrapping off 40-year old contact paper and various and a sundry shelves, Jane shared her a good portion of her life story with me. The story was both heart-breaking and infuriating.

In short, 14 months ago, Jane lost her job at 55 years old. As the job market has continued to unravel, she has given up or lost her home, her car, many of her prized possessions, and to some extent her pride. She has been diligently searching for a job with each interview ending the same way, they either thought she was too old or too qualified and would leave if something better came along (I wish as an interviewee, one could ask the interviewer “how do I know if I say I’ll be here for 2 years, you will keep me for at least 2 years?”, but I digress.).  She is praying that what little she has left in a storage unit will not be auctioned off at the end of the month, and she has literally begged her cell phone company to give her one more month.

In the last few months, Jane has become almost entirely reliant on friends to keep a roof over her head. She is homeless–though not in the sense we almost always imagine in hearing the word. She is apart of the growing number of folk that have lost a job and a home. They are not sleeping on the street, or at a shelter or even in their car, but are shifting from couch to guest room as they try to stay economically afloat. No job. No home. She is dependent on the kindness (and/or tolerance) of friends and relatives.

Jane’s particular situation demonstrates the disconnect that exists between the haves and have nots as the economy continues to unravel around us. See Jane has some well-off friends, but none of them are willing to help her. One rich Beverly Hills friend who lives alone told her, that she is unemployed because of “bad choices”, and therefore she couldn’t let Jane stay with her. Another said she needed to be able to have “alone time” in her 4-floor house with a rarely used finished basement. (It is only because of a friend who is living much closer to paycheck to paycheck and is supporting someone else who also lost a job that Jane currently has a roof over head.)

Jane’s friends are just a localized version of the “disconnect” shown in all of its glory on the Hill and in the media as they gravitate between ‘let them eat cake’ in the form of tax cuts, and patting financial institutions with bailout funds on the back while they do nothing but hold on to the funds. I know at least 10 people who are currently out of work. They are trying to decide how much longer they can afford their rent, their mortgage, or their car. Folks need jobs. Not tax cuts. Nobody is going out to buy a big screen TV with it.

Some ideas that could help put people back to work, train the long-time unemployable, and increase the size of the middle class are largely absent from the stimulus. How about some RFP’s to address our crumbling infrastructure? That would connect private industry to job creation. How about some access to the training programs that are afforded to some TANF recipients in some states for those who have been unemployed for more than six months? How about encouraging cities to take back abandoned houses and create opportunities for entrepreneurial non-profit and for profit organizations with a way to reposition the properties like NYC has done with the Neighborhood Entrepreneur Program? How about supporting some funds for small business—the nation’s largest employer? All of these things are key to maintaining viable communities to live and work.

The same old tax cut, entitlement spending, and cuts to programs that encourage future growth (uh, education any one?) ain’t gonna do it. But as Kevin Costner once said, “In America, they’d rather give you a handout then give you a job.” I guess the latter is too much like right.

* Jane is not her real name, duh.

Bringing the Pain and Sharing the Consequences

by Guest Blogger: Kenneth Stewart

If it is true that the housing bubble was the root cause of the financial crisis, it seems an obvious solution would be to delay an immediate devaluation of housing stock, based on the premise that home values could recover nicely over time if corrective housing policies are put into place.  Financial institutions are being hit by the double-whammy of mortgage foreclosures, and expectations that future foreclosure rates will be even worse, which devalues a wide range of real estate-related assets.  As the foreclosure scenario plays out, home values take another hit, and a vicious cycle is perpetuated.  The answer to the question of how to halt this vicious cycle may lie in a commonly used tool in the affordable housing field: low-interest rate, deferred second mortgages. 

 

The mortgage program would work as follows.  A homeowner with a mortgage they can no longer afford would go to their lender with a proposal: refinance my loan at a principle balance and interest rate I can afford, and I will get a second mortgage from my local government/nonprofit program administrator such that the combined refinancing proceeds will equal 90% of the current outstanding balance.  In other words, take a 10% loss and convert your asset from a non-performing loan to a well-underwritten conventional mortgage.  Localities have already been granted funding in the recently enacted Housing Bill that can be used to fund second mortgages.  The Treasury Department would be well-advised to dump a significant portion of the Wall Street bailout package ($250 billion would be helpful) into this kind of initiative. The government would be directly investing in citizens and communities, as opposed to risky, complex securities, and banks and financial institutions would be clear indirect beneficiaries by limiting the loss of loan principal. 

 

The program would have to be limited to homeowners who could afford a conventional first mortgage of at least 60 percent of their current balance.  If they are unable to afford that minimum, it means they could never afford the home in the first place.  The government should not attempt to provide a stop-loss for such poor decision making, and possible fraud, on the part of the parties involved. Where the program is applied, lenders would still face a write-down in various residential assets–albeit smaller at 10% write down — plus the loss of any prepayment penalties that would compensate them for the loss of future up-ward adjusting interest rates.    If we couple this with some type of moratorium on the amount of commission that can be earned by realtors and appraisers involved  in the sale of foreclosed properties, then the parties who came together to create the mess will have to share in the pain of correcting their mistakes.    A salary cap for the executive leadership of participating financial institutions would complete the circle.

 

As tempting as it may be to  leave those responsible for the housing bubble at the mercy of the market, the best approach would be a program that targets the root cause of the current crisis, through direct investments in the hardest-hit communities. A well-structured nationwide second mortgage program could achieve many important results.  Banks would benefit from having hundreds of thousands of loans refinanced with the lowest possible loss of principle, cities would stabilize neighborhoods and protect their tax base by keeping homeowners in place and avoiding foreclosure sales that would drive market values down even further, homeowners would benefit by keeping their home and getting some protection as related to their equity position, and local housing agencies and their nonprofit partners would benefit from having a role in closing and servicing second mortgages that would give them a new source of revenue, as well as a vested interest in getting home values back up to maximize recovery of  funds invested for the second mortgages.   Such a program would still require billions of dollars in federal outlays, but it would be through a mechanism that allocates the pain as well as the benefits as broadly as possible, while focusing efforts on stabilizing home values – which is the root cause of the problem.

 

Mr. Stewart currently underwrites equity investments in affordable housing projects for Enterprise Community Investments in Columbia, MD.  Prior to going to Enterprise, he was with the Prince George’s County Department of Housing and Community Development (DHCD), serving first as Deputy Director for Capital Markets, and later as the Deputy Director of the Redevelopment Authority, where he had primary responsibility for the tax-exempt bond,, homeownership, and the federal HOME block grant programs.  Prior to his appointment at PG-DHCD, Mr. Stewart served as Director of Public Finance for the D.C. Housing Finance Agency, where he was responsible for processing, underwriting, structuring and closing transactions involving the issuance of over $300 million in tax-exempt bonds. He holds a B.A. from the University of Denver, (Denver, Colorado), and a Master of Arts in Public Administration from Howard University, (Washington, D.C.).