Finger pointing and blame-gaming are traditional political fare. But last night's debate was a missed opportunity to talk about the foreclosure crisis in real detail.
There is perhaps no more important, or emotional, indicator of the health of a community than the solvency of their homeowners and landlords. Clusters of abandoned homes have a destructive ripple effect that can depress entire zip codes for decades. Lower property values and decreased tax revenue lead to property abandonment, absentee landlordism, small business closures, vandalism and crime. Once the cycle starts, it’s hard to stop.
And times are terrifying – one housing expert recently told me that some 20 million mortgages are underwater, meaning that their homeowners owe more than what the home is currently worth. Regardless of what we think we know about who these people are or how we got here, the fall out is going to be severe. And it's going to hit cities particularly hard.
The Center for Responsible Lending has a powerful interactive tool that looks at the estimated fallout from the foreclosure crisis state by state – specifically in terms of lost home value and tax revenue. The potential for wealth destruction is chilling.
The heated debate around the current round of bailout packages, and the credit market meltdown that preceded them, have obscured review of some important provisions that were included in the Housing And Economic Recovery Act that was passed in July, and are specifically designed to protect homeowners facing foreclosure. (Frankly, it’s vexing that neither candidate, nor most pundits, have been talking more about this.)
Grab a cup of coffee and read it in detail here and here, but the bill allows lenders to bring failing mortgages to the Federal Housing Authority (FHA), which will guarantee a new mortgage at 85 percent of the current appraised value of the home. The Congressional Budget Office (CBO) estimates that lenders will bring up to 400,000 mortgages to the FHA over the next three years. The clock on the offer started ticking on October first, and I'll be curious to see how it goes.
But experts fret that this will not be enough, even with the additional legislation.
Hopefully, these troubling times will be an opportunity for financial innovation in the best sense. One such idea has been put forth by a Democratic congressman from Tucson named Raul Grijalva. His "Saving Family Homes Act" proposes to help homeowners whose mortgages have been foreclosed petition to stay in their homes as renters. From his website:
"The Saving Family Homes Act is one of the few proposed remedies for the current mortgage crisis which requires no expenditure of federal funds or additional bureaucracy, while giving immediate relief to millions of families facing foreclosure and preventing home vacancies that harm neighborhoods.
To prevent abuse by speculators, the Act limits eligibility to mortgages on single-family, principal residences, occupied for at least 2 years, which sold for less than the median home value in the metropolitan statistical area in which the home resides or the median value in the state if such information is not available."
No doubt this debate is personal to him - Congressman Grijalva is the son of a Mexican immigrant and lives in one of Arizona’s poorest districts. (He also voted against the recent bailout package.)
I’ll be posting more about homeownership and financial innovation in the weeks to come, and would welcome ideas and solutions from the crowd.