The heaviest hitter in progressive politics will pressure federal housing officials to change their approach to mopping up the aftermath of the foreclosure crisis on Wednesday.
At a rally with dozens of local government officials from around the nation in Washington, D.C., Sen. Elizabeth Warren (D-MA) will call on the Obama administration to stop inviting Wall Street speculators into the landlord business and start doing more to keep struggling borrowers in their homes and neighborhoods.
The cause is a natural fit for Warren, who has long criticized various elements of the federal response to the housing and foreclosure crisis. But Wednesday’s rally will be the first time the influential Democrat lends her public firepower to this specific populist fight. A coalition of activists, analysts, and lawmakers will ask the government to change how it auctions off distressed homes — or rather, to whom it sells them.
The federal government currently holds hundreds of thousands of failing mortgages on its balance sheet through various agencies. This is how it’s supposed to work when the housing market takes a catastrophic turn: HUD’s mortgage insurance system pays out tons of claims to restore the private lending market’s flexibility so that the Wall Street-created recession doesn’t destroy working-class people’s access to mortgages for a whole generation. But buying up all that bad paper put federal housing agencies deep in the red.
To try to clear all that red ink and restore the system’s flexibility, the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) has started auctioning off packages of seriously delinquent loans. The auction systems have features designed to help keep struggling borrowers in their homes where possible, and to ensure surrounding communities don’t become blighted by foreclosures and vacancies where salvaging the mortgage is impossible.
But the auctions are failing to deliver on those borrower and community protections, the lawmakers and activists rallying Wednesday say, and instead are inviting the same financial industry that tanked the housing market less than a decade ago to snap up family homes on the cheap.
Without reforms, Center for Popular Democracy campaign coordinator Amy Schur said in an interview, the system is little more than a “land grab” for well-heeled corporate investors.
The community stabilization standards are crap.
“These government agencies, a central part of their mission is to create affordable housing. But they are fueling this Wall Street buy-up and really thwarting the work of local lawmakers, cities, and housing groups that are working to address these crises. It’s beyond the pale,” she said.
Private equity firms and hedge funds have leaped at the chance to buy up family homes at auction prices. That fresh demand drives up bids and helps clear all that bad paper off the federal balance sheet faster. But it also shuffles even more houses into a frightening new market for rental housing where Wall Street firms act as remote landlords and manage the properties according to their own profit motives rather than the best interests of local communities.
It should be possible to fix what’s broken about the auctions system without abandoning the approach, Schur said.
“We see something happening that we think is really terrible, in terms of the selling off of our precious housing stock to Wall Street speculators by government agencies. But we also see an alternative that’s really fantastic,” Schur said. “There’s an opportunity in this crisis to get greater community control over our housing stock.”
The bit of bureaucratic judo that Warren, Schur, and their compatriots are calling for involves changing the rules of the auction programs, the FHA version of which is called the Distressed Asset Stabilization Program (DASP).
In barely three years of existence, DASP has produced a stunning turnaround in the agency’s finances, converting $16 billion in red ink into several billion dollars worth of black. Insofar as the auctions deflate the funding pressure on FHA and provide the government more room to maneuver, the program has been a success at making the overall housing finance market more stable.
But DASP isn’t doing as much as it could to help rescue struggling homeowners from foreclosure, eviction, and a massive drop in economic security.
Just a fifth of the federal distressed-loan auctions come with “community stabilization requirements” attached that require buyers to address local interests as well as serving their own immediate financial needs. Auctioned loans with those conditions tend to perform much better, according to research by Center for American Progress housing finance expert Sarah Edelman. The people-over-profits version of the auctions produce both better odds of a successful loan modification and a higher chance of a good outcome for the surrounding community should the house go into foreclosure.
There’s an opportunity in this crisis.
“If you buy a pool of loans through such an auction, you commit to doing what’s called a Neighborhood Stabilization Outcome [NSO] on at least half the loans in the pool. You have a lot of flexibility, but essentially it means you can’t foreclose,” Edelman said in an interview. “We think those requirements could and should be stronger, but they’re a start.”
CAP is part of a large coalition of national and regional actors that have publicly called on federal officials to put a greater share of the loans it auctions into the NSO system. “We think they need to do more,” Edelman said, specifically calling for stricter enforcement of the public-interest standards that buyers agree to in NSO auctions.
But the group rallying Wednesday would like the government to go even further. Schur pointed out that even the small share of the auctions that do impose community-oriented requirements on the buyer still get won by Wall Street speculators almost 90 percent of the time. And after the auction’s over, the community-interest rules aren’t that hard to game for profit, Schur said.
“The community stabilization standards are crap,” she said. “The speculators are intending to turn them into rentals, disregarding the affordability needs of the community. They’re going to set the rent that is the highest they can get.”
The activists’ answer to Wall Street’s runaway rent-seeking? Give non-profits first crack at the mortgages that are local to their area before letting the high-dollar auction dynamics dictate their fate. One way to do that would be to create a “first-look” auction system for bidders who can prove they operate at higher standards for saving people from foreclosure and tailoring outcomes to local affordability concerns.
However they do it, Schur said, the important thing is to tap into local expertise and shared community interest in the long-term value and stability of neighborhoods. They won’t save everyone’s home — “even in the hands of mission-driven good actors, probably about 50 percent of these mortgages will still go to foreclosure,” she said — but they’ll at least ensure that the public auction of family homes honors the housing affordability and community development pieces of the housing agencies’ missions.
“It would be one thing if we had tapped out all the capacity of non-profits, but that capacity has not been tapped, because Wall Street speculators beat non-profits at auction,” Schur said.
Schur, Warren, and their rally compatriots are due to meet with both the HUD official who oversees DASP and with Federal Housing Finance Administration Secretary Mel Watt, whose agency operates equivalent systems within Fannie Mae and Freddie Mac.
They are likely to find an open ear in those meetings, as concerns about how the auctions function have been raised repeatedly over the last year and have already prompted some small updates to the rules HUD’s auctions use.
“HUD understands that there are non-profits that have the capacity to do really good work here and I fully encourage the steps they’re taking,” CAP’s Edelman said. “I hope they would continue to do more to engage the non-profit community.”