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July 10th, 2013

Five years after the crash: a way to save our mortgages

Harry C. Alford

It is now five years since the great financial crisis of 2008, which saw housing markets plummet, the stock market swoon, and millions of Americans lose their jobs in the wake of the recession that ensued. While many sectors have recovered - for example, the stock market has eclipsed pre-crisis levels and we are once again creating new jobs, albeit at too slow a rate - one area still lags woefully behind. There are still tens of millions of homeowners with "underwater mortgages" and millions of Americans struggling or unable to afford the payments on their mortgage loans. A very high number of them are Black.

The effect is a drag on housing prices, neighborhoods pocketed by abandoned homes and foreclosures, and consumers who can’t contribute to an economic recovery by spending money on consumer goods, since they are burdened down by mortgages they can’t afford. America caught a cold and Black America caught pneumonia. In fact 34% of our total net worth evaporated right before our eyes.

There are many factors that have contributed to this state of affairs. Many of our largest mortgage servicers failed to even communicate with borrowers who were unable to keep up on their mortgage payments, much less worked with them to find ways to keep them in their homes. The federal government set up several programs to try to help distressed homeowners, but their impact has been spotty, and few lenders have used them to reduce mortgage principal for distressed, underwater borrowers to levels that are financially sustainable for the homeowner.

An example of how the federal government has done some good, but not enough is the Federal Housing Administration, or FHA. The FHA, to their credit, has established loan modification programs to help borrowers keep families in their homes, by modifying the payments to a level the homeowner can afford. The FHA has also required FHA servicers to explore whether borrowers are eligible for such modifications. FHA has even recognized that some servicers are not doing a great job in helping defaulted FHA borrowers, and is exploring ways to put more pressure on these servicers - including asking Congress for legal authority to take servicing away from poor servicers.

Unfortunately, FHA has not taken the obvious step to make sure that all FHA borrowers get a fair shake - by retaining qualified entities that do extensive borrower outreach, - actually going out to the homes and meeting with the homeowner in person, to walk them through the process of seeing if the house can be saved. FHA could quickly and easily test out the effectiveness of such an approach by testing out a pilot program to do this for 50,000 to 100,000 defaulted FHA loans, to quickly determine its impact.

This is a practice that is commonly followed in the private sector. Mortgage owners and private mortgage insurers of distressed mortgage loans are hiring firms to do this "high touch" servicing and in-person borrower outreach. It is a win-win. Reducing payments to an affordable level can keep families in their home when otherwise foreclosure would be inevitable. This gives homeowners a fair second chance.

But it is also good for the owners of the mortgages. The alternative - foreclosure - is much more costly. The lender recovers more from the defaulted asset when the borrower can resume payments that it would ultimately recover under foreclosure and the lender avoids the significant property deterioration that commonly occurs during a long foreclosure period.

Of course, some homeowners will not qualify for a loan modification - for some, there is no real way to keep them in the home. But here again, in-person outreach paves the way for a different type of win-win result, where the homeowner agrees to do a short sale, allowing the home to be sold at the current market price. This is much better for the homeowner’s credit history than a foreclosure, and it provides a higher return for the owner of the mortgage loan.

Finally, all this is better for our nation’s economy and our neighborhoods. These actions will address the backlog of defaulted homes which are a drag on housing prices, alleviate the neighborhood deterioration from having abandoned homes, and give homeowners a chance to get back on their feet. The housing crisis has been severe - so our actions to address its impact must be equally strong. It is without doubt that Black homeowners were targeted with these sub-prime mortgages and the rules were loosen to make a quick buck by mortgage brokers. It became a dream transformed into a night mare. The suffering is more than a stock exchange drop. Real lives have been threaten or destroyed. The "Calvary" did not come for these victims. Thus, we must come and save the American Dream.

Harry C. Alford is the co-founder, President and CEO of the National Black Chamber of Commerce.

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