People losing their homes has been a national problem, ever since the housing bubble burst, leading the country into recession. A new federal report has revealed that real estate speculation was largely to blame.
Back in 2006 the economy wasn’t bust. It was booming. Investors were snapping up multiple properties with help from the subprime credit market. Researchers from the Federal Reserve Bank of New York found that more than a third of all U.S. home mortgages handed out in 2006 went to people who already owned a home. In fact, people who owned three or more properties were the fastest growing part of the market. The frenzy drove real estate prices to unprecedented levels. In California, the average home price more than doubled from 2000 to 2006.
Today, we’ve come to know that the subprime credit market was corrupt. That blown up housing market burst. And while it cost speculators a lot of money, it cost first-time homeowners a lot more.
Kevin Stein studies foreclosures, and he’s become very busy over the last few years. As associate director of the California Reinvestment Coalition, he fights predatory lending practices and negotiates with banks to keep people in their homes. Stein told me that he thinks lax federal oversight helped create the economic mess we find ourselves in today – that’s no surprise. But he also said, despite talk of reform, the Obama Administration still isn’t doing right by the people. KALW's Ben Trefny asked him to lay out the problem and provide his solutions.
KEVIN STEIN: The reasons why this is occurring – the banks' financial interest is against helping people. Or the banks are overwhelmed and never knew there would be millions of foreclosures. Or they've had to hire people so quickly that they have people who don't know what the banks want them to be doing, or the people making decisions. Whatever the reason, people are suffering as a result of the system being crazy.
BEN TREFNY: What would you do to make this right, if you could?
STEIN: Well, one is around principle reduction. So there are maybe a couple million people in California who are under water. Loan servicers can modify peoples' loans and reduce the principle so that what they owe is more in line with what the value of their house is. They are generally not doing that. We did a study of some of the areas in California under the Hamp Program. It seems like 5% of the loans include some form of principle reduction.
Interestingly, the banks, in the minority of cases, own the loans they are servicing. Usually they service loans on behalf of other investors or companies or entities. Banks seem more likely to reduce principle when they own the loan, which makes sense. As the owner of the loan, you'd rather have someone paying you a little less than not paying you at all. Which raises the question: What are they doing for the majority of loans that they don't own? Why are they reducing principle? So what I would do is enforce a mandatory loan modification that included.
Speaking of track, another big concern that we have is the issue known as the "dual track." The main path forward is to try to secure a loan modification so borrowers who are struggling will contact a loan service, or maybe they'll work with an advocate to help them do that. While they're submitting all their documents and being diligent and responsible, the banks will continue the foreclosure process. Sometimes we will hear stories of people who actually got a letter saying, "Congratulations, we are offering you a loan modification!" but it's after they've already lost their home.
It's like a race. The right hand is not knowing what the left hand is doing. So that's the duel track. Why should we have the dual track? We had a state bill we worked on with allies last year that just focused on the dual track. It got killed in the first committee, which is the Senate banking committee.
TREFNY: Was the reasoning because the banks still need to look out for their best interest, in that if this bank loan modification doesn't work out they still need to take action? If they slow down the process on one or the other, then they are going to end up losing money?
STEIN: I think that's a fair representation of their interest. They want to be able to continue the process. If they say that they know how the process is going makes the borrower more responsive or more worried, we're saying make a decision. Fully consider someone and decide. We're not saying you have to give the modification to everybody. Based on the existing programs, decide if someone qualifies for a modification and if they do not, then proceed with the foreclosure process.
If they do give them the modification, so we don't have people falling through the cracks, then they could have been saved. Their homes could have been saved. That's a preventable foreclosure. We shouldn't have that situation yet. So that's a big problem.
In terms of what, in the real world, what should happen? There should be a new – this is maybe more than you want to know – the regulator should be better at making sure the banks do something. They should make sure the banks are accountable for at least following existing laws and rules. We need modifications that are sustainable. It can't be voluntary. It has to be mandatory.
TREFNY: So to summarize your last point, basically: They should actually do something.
STEIN: (laughs) Yeah. Unfortunately, we have recalcitrant financial institutions that are affecting people day-to-day. Regulators that are not doing anything about it. And policy makers who seem to be afraid to change the dynamic.