SOLVING THE FORECLOSURE CRISIS

by Elizabeth Panella
Tufts University

Semifinalist

Because homeownership is central to a family's security, well-being, and long-term asset accumulation, the foreclosure crisis must be attacked aggressively by Federal and state governments. Critics of stimulus spending argue that the worst of this crisis is over, but many trustworthy indicators suggest that foreclosure rates will not return to pre-crisis levels for several years. In order to slow foreclosure rates and begin to repair affected communities, steps must be taken both to prevent existing homeowners from facing foreclosure and to prevent lenders from issuing mortgages that are beyond the ability of the borrower to repay. Although the latter step of increasing regulations regarding predatory lending in the future is beyond the scope of this proposal, it is absolutely essential. Without changes in mortgage lending, any positive steps taken to protect current homeowners will be negated.

Two primary methods must be used to help borrowers who are currently in danger of losing their homes. First, refinancing opportunities must be increased, particularly for families who were coerced into borrowing at sub-prime rates. This is a policy area that has already been addressed, but more must be done. Many of the programs previously implemented by state legislatures have used rigid standards of refinancing without regard to the individual's specific needs. In some cases, this has caused homeowners to spend more money than they would have lost in a foreclosure!

As of November 2009, Maine is the only state requiring loan servicers to produce individual calculations. Their groundbreaking legislation must be implemented nationally in order to benefit homeowners elsewhere. Second, borrowers who have lost their jobs and cannot benefit from refinancing alone must have an additional option, especially in cities and neighborhoods that have been practically obliterated by the crisis.

Although the crisis has affected every state and region of the United States, certain areas have suffered disproportionately. Sunbelt areas such as Nevada, California, and Florida experienced housing bubbles that popped as the economy declined. Many borrowers suddenly held mortgages that were worth more than the value of their homes, leaving them unable to sell the home to pay off their debts in case of job loss. Older industrial centers such as Buffalo, Cleveland, and especially Detroit have suffered acutely as well, since the manufacturing jobs they depend upon have increased their flight to cheaper labor markets abroad. This has caused whole neighborhoods to implode as entire blocks are vacated. We desperately need a solution that can protect our neighborhoods and preserve our cities from complete obliteration. I propose that the Federal government create a program that specifically targets homeowners in the hardest hit neighborhoods.

In order to qualify for this program, borrowers must meet two conditions: they must have lost their job in the past 18 months and they must live in a census tract that has experienced foreclosure rates above the national average. Unemployment is a necessary condition for participation because the needy borrowers who are still employed can benefit from refinancing alone. Also, participation is limited to high-foreclosure census tracts because the damage to a neighborhood is more than the sum of its parts (individual foreclosures). When a single family loses their home, it is an unfortunate occurrence that may be mitigated by help from relatives or neighbors. When entire blocks lose their homes, social and charity services and networks cannot prevent devastation. Crime rates inevitably soar and local businesses lose monumental amounts of revenue. Also, limiting the areas that can apply for these funds will help to keep down costs, which can increase political viability.

PARAMETERS OF THE PROGRAM

I present a holistic, neighborhood based approach to preventing foreclosures. The idea behind my program is simple: government grants would help homeowners stay in their homes, and the homeowners would in turn contribute volunteer hours to strengthen their communities. I believe that these actions would provide invaluable worth affected communities because if we can weather this storm we will come out at the other end of this crisis with stronger neighborhoods than we started with.

Once an individual qualifies for the program based on the determining factors discussed above, they would receive a voucher to pay 25-75% of their mortgage interest for up to one year. This voucher would not be free, however. The recipient would be required to participate in community service for at least ten hours per week for the duration of their involvement, with more hours being required as the percent of their payment covered increases. Additionally, mortgage lenders would be encouraged to defer principal payments for the duration of the program.

Although this sounds like an unrealistic expectation, the percentage of each payment that is directed towards principal is actually very small for recently issued mortgages. Unless a property is covered by FHA mortgage insurance and thus the lender could recoup their investment through an insurance claim, they would benefit more from accepting interest payments only (which are sometimes 90% of the total payment ) than by foreclosing upon the property and selling it at auction for a fraction of its actual worth. In Detroit, this price is sometimes as low as $100.

The types of community service participants could engage in would of course vary from community to community. Existing social service providers, such as soup kitchens and tutoring or mentoring programs for local children should of course be utilized. More creative solutions should also be considered, such as babysitting services for working mothers struggling to afford the astronomical price of child care. Urban farms could also be created, which would serve multiple purposes: providing work for program participants, increasing nutrition in inner city areas that often lack decent grocery stores, and raising revenue by selling the produce. Program participants could also create new programs based on the needs of their own neighborhoods.

The program would require the hiring two sorts of liaisons: lawyers or other professionals to make the agreements with banks, and social workers or managers to determine eligibility, enforce community service requirements, and create new programs. These jobs would be created in areas with high unemployment and are therefore another positive benefit of the proposed legislation.

Solving the foreclosure crisis will not be easy. The economic crisis has affected every American, and our government has already stretched itself thin trying to prevent further catastrophe. We must dig deeper however, at least for a short while, in order to save entire cities and regions from complete destruction.

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