President Obama: End the Foreclosure Epidemic

Today, more than 10 percent of Americans are in mortgage default. Twelve million borrowers are underwater (meaning they owe more on their homes than what they're worth). By the end of this year, an additional 15 million borrowers are expected to be in the same situation. 

2008 was a bad year for housing in the United States. And yet, as Kathryn Baer commented on yesterday's post, we heard nothing of "housing" or "homelessness" in President Obama's inaugural address. What gives?

There's no question that foreclosures and bad loans have made our economy sick and, despite the best efforts of our federal government to provide treatment, it is not improving. So is it time to take a bolder approach to addressing the root causes of our economic recession? Should we be approaching our housing woes as we would a smallpox plague or SARS outbreak?

In other words, is it time to order a quarantine?

This is the parallel drawn by David Abromowitz, a fellow at the Center for American Progress (and, if you ask me, one of the most knowledgeable and sensible voices out there in regards to the housing crisis). Here's his smart analogy:

By any reasonable measure, we confront a spreading foreclosure epidemic that is eating away at the core of the nation's economic health. However well-intentioned, private and governmental efforts to date have not contained the damage. In the early stages of a public health crisis, voluntary treatment of the ill also fails to stop the spread of disease. What makes certain epidemics so devastating is that normal delivery systems for patient treatment are overwhelmed by the sheer number of cases all happening virtually at once.

Moreover, epidemics often infect health workers themselves, further weakening the normal recovery systems. And when rising illness rates and falling resources combine, the health care system is further left unable to help other ill patients, who themselves then get sicker than they might in normal times.

Looking at the current foreclosure crisis as an epidemic, the parallels emerge. At a normal rate of borrower defaults, the financial system can "clear," in industry parlance, bad assets such as troubled home mortgages through workouts and occasional foreclosures. Today, however, it is abundantly clear that multiple foreclosures in many communities are infecting neighboring homes with rapid value dissipation. If left unchecked, this will lead to further community malaise due to lost tax revenues, increased crime and fire prevention, and a general draining of public resources.

He's right. The effects of inaction are too devastating to sit back and continue waiting for a trickle-down. The National Alliance to End Homelessness predicts that 1.5 million additional Americans will experience homelessness over the next two years (that's over and above the 1.5-3 million who usually become homeless) if no action is taken. 

It's time to nip the root of the problem in the bud before it can get any worse.

Consequently, Abromowitz proposes three bold but sensible steps that could have a quarantine-effect on our nation's foreclosure outbreak:

1. Accelerate modifications and prevent unnecessary foreclosures by revoking Real Estate Mortgage Investment Conduit (REMIC) status (which comes with generous tax benefits for residential mortgage trusts) for any residential home mortgage loan-holding entity that forecloses on more than a certain percentage of all of its mortgages. (Read more about this here.)
2. Order a federal foreclosure moratorium to prevent further price declines and make loan modifications to avoid foreclosure a more appealing alternative.
3. Even the bankruptcy playing field through judicial loan modification. This would allow primary properties to be included in bankruptcy proceedings, a privilege that is now available to those with multiple homes but not middle- and lower-income households with *only* one property.

There's no doubt that the cost of letting things go as they are is too great to sit back and do nothing. And while I hope that federal government's bailout money (version 2.0) has it's intended effect, I'm skeptical. So many people, so many houses, have already fallen through the cracks into our nation's over-stretched, under-funded safety net.

And the problem is getting worse. The costs of inaction - whether it's uprooted families, homeless children who do not receive supportive services, or dilapidated neighborhoods - will surely be even more devastating and problematic for our communities long after President Obama has served his eight years in the White House (ahem). 

Is it possible that these regulatory tweaks could have a more stabilizing (or quarantining) effect on our troubled housing markets than the billions of bailout dollars being pumped into our economy?

And if so, then what on earth are we waiting for?