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 percent 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 is 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 its 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. The 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, the 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. The FHA could quickly and easily test out the effectiveness of such an approach by testing 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 homes when foreclosure would otherwise be inevitable. This gives homeowners a fair second chance.