"We the People" of the United States are desperate for help. It is a priority to create realistic programs to stabilize the residential mortgage market and reduce the rising tide of foreclosures throughout the nation. At the end of 2008, almost ten percent of all mortgages in the United States were either delinquent or in foreclosure, according to the Mortgage Bankers Association. These are ominous signs for real estate values across our country. As homeownership rates plunge and equity evaporates, we all suffer the negative effects on our quality of life.
As the magnitude of the foreclosure tsunami grew, the federal and state governments adopted programs encouraging lenders to modify troubled loans. These efforts failed miserably as they did not stop the free fall in home values, keep owners in their homes, or stop the plunging equity markets. Even with loan modification relief, many borrowers are suffering severe financial hardship due to job loss and still cannot afford the payment.
Industry statistics indicate that within 6 months, fifty percent of all loan modifications fail to prevent foreclosure. The relief offered by lenders to borrowers in distress is little more than Band-Aid relief instead of what's really needed: reconstructive surgery to remove and replace their loan's toxic terms with terms commensurate with the borrower's ability to repay and proportionate to the home's current true value.
Economic history shows that success in ending this crisis will come only from a new public-private partnership. The nonprofit sector has long been the source of success to help achieve national priorities. Today, nonprofit housing and mortgage counseling groups have the technical financial experience, entrepreneurial approach, market sophistication, and on-the-ground relationships to make quick progress in reversing the current grave trend in foreclosures.
As an example, the Society for the Preservation of Continued Homeownership (SPOCH), a New Jersey nonprofit for which I serve as the Executive Director, has the capacity, experience, and passion to keep people in their homes, stabilize market values, and improve the likelihood of success of the TARP II legislation.
How? Pay 'em off and buy 'em out. Instead of spending taxpayer dollars to fund the purchase of corporate jets or luxurious retreats (never to be repaid) let's put the dollars to work serving the needs of our economy and ensuring that taxpayers continue to believe in the great American dream of homeownership. To initiate this program, funds could come from the Federal Home Loan Bank System or the Federal Reserve Banks, Treasury Department programs, or from state programs distributing federal funds.
As an example of a public-private partnership, SPOCH's HomeKeeper Turnkey Program would use TARP II or other government funds to (1) Purchase at a deep discount from mortgage holders nonperforming mortgage notes and pools of nonperforming mortgage notes; (2) Stop foreclosure and restore affordable homeownership for thousands of qualified, at risk homeowners whose unsuitable mortgage loan terms have resulted in foreclosure; (3) Recycle newly unaffordable subprime mortgages into performing, profitable mortgage loans which will be sold to the secondary mortgage market; and (4) Create jobs for displaced real estate professionals to administer the statewide program and by hiring new businesses to implement recommended green initiatives to modernize modest income homes (thereby reducing homeowners' long term costs for energy consumption).
As a mortgage holder with unilateral modification authority, SPOCH would appoint an HomeKeeper Counselor to meet with qualified homeowners to review options to foreclosure designed to preserve continued, affordable homeownership. The homeowner would provide authenticated updates to current employment and finances. An FHA 203K property appraisal and inspection report would follow to confirm the home's current fair market value - as the basis for a structured loan modification that makes sense for all stakeholders.
In the short term, the loan modification will result in reduced loan payments for the homeowner. Over time, as the economy and housing markets improve, program participants will be required to adhere to a strict budget, and eventually return a portion of the home's appreciated value upon its sale or refinance. The sale of modified, performing mortgages to the secondary market, and the assignment of owners' equity makes the HomeKeeper program self-funded and not dependent on subsequent government support.