Noting that almost 30 percent of the homes in California are underwater — meaning that they are worth less than the amount owed on their mortgages — Congressmember Lois Capps is advocating for principal reductions as part of her three-pronged approach to easing the housing crisis. The other two elements include offering more refinancing opportunities and creating a Homeowner Bill of Rights.
If banks were to reduce principals on mortgages, they would, of course, lose money, but they also take a loss when they foreclose. Advocates of principal reductions reason that it makes much more sense to keep people in their homes. “Everybody takes a haircut,” Capps and her staffers are fond of saying, suggesting that if banks share a bit of pain, they might all avoid a scalping.
Capps explains that, when somebody loses a home, they also lose equity which they might borrow against for a small business loan or to pay their child’s college tuition. Foreclosed homes also impact the values of neighboring properties and put a dent in property tax receipts. Therefore, the effects of foreclosures reverberate across the economy.
Incentivizing banks to reduce principals has proved to be a Holy Grail of sorts. The federal government, to a small extent, has implemented refinancing and loan modification programs. Two programs, the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP), have been in place as part of President Obama’s Making Home Affordable program since 2009. Their impact has been much less widespread than the feds had hoped, but the president is angling to widen the eligibility criteria for the programs, a move that Capps lauds.
HAMP has provided aid to about one million homeowners, whereas Obama suggested it would help seven to nine million when he rolled out the program. For applicants to qualify, their mortgage payments must account for no more than 31 percent of their income. Capps employs dedicated foreclosure caseworkers in all three of her offices; they either assist homeowners in applying for HAMP or connect them with other resources. “It has worked,” Capps said of HAMP, “but for a miniscule number of families. It has been fraught with bureaucracy.” Many people who might have benefited from a modification — which lowers their interest rate to 3 percent for three years before it increases at one percent a year until it reaches the market rate — fall too far behind in their payments while waiting up to nine months to get approved.
Backing a large number of mortgages ain’t cheap for the federal government. Capps believes, per the president’s State of the Union address, that mortgage relief could be funded by a fee or tax on banks that would serve the secondary purpose of meting out a bit of comeuppance to the financial industry that fueled an artificially inflated market. Such a fee, however, is extremely unlikely to make it through Congress alive.
“I’m frustrated because I don’t think we’ve done enough,” said Capps. When you hear those [Republicans] that want to be president talk about housing, they just want the bottom to fall out. My Democratic colleagues feel this is such a huge crisis that the federal government can make a difference. We can’t force the banks to do what we wish they would do because it is the private sector, but we can provide more incentive.”
The Homeowner Bill of Rights would streamline the modification process and create an appeals system for those who have been foreclosed on.