Foreclosure Crisis Persists, as Families Eagerly Await ‘Cramdowns’

A sign is displayed in front of a foreclosed home on March 12, 2010, in Bridgeport, Conn.   (Photo by Spencer Platt/Getty Images)

By Roger Bybee

Can we finally stop worrying about the long-term devastation from high unemployment projected for up to seven more years, the large numbers of home foreclosures, and the millions of families anxious about being tossed out on the street?

After all, the U.S. economy grew at an impressive 5.9% annual clip in the further quarter. Profits are up. Corporate savings are up. But as the saying goes, statistics can be tortured into confessing just about anything. Robert Reich, the former labor secretary, incisively analyzes what he properly calls the hollow, unproductive economic activity that underlies this "sham recovery."

Still, leading Democrats can be heard trying to make the most out of rapidly declining job losses. Yes, there has been a huge improvement over the last miserable months created by the deregulatory approach of George W. Bush (and his predeceessor) that created the Wall St. meltdown. But a reduction in job losses is hardly an inspiring campaign theme for the 2010 mid-terms.

Worse, complacency about the sham recovery could inhibit the kind of federal action needed to create public jobs on a mass scale and force banks to un-freeze credit to small businesses, and the development of effective federal assistance programs the foreclosure crisis is almost certain to intensify even further in the coming months.

FORECLOSURE CRISIS STILL BUILDING

The scope of the foreclosure problem is already much more massive than is commonly understood, and is likely to metastasize in the coming months.

• The daily pace of foreclosures is now occurring at ten times the number during the Great Depression, according to the calculations of Nomi Prins, a former Goldman Sachs executive and author of It Takes A Pillage: Bailouts, Bonuses and Backroom Deals.
• Across America, "One in eight mortgages is in default or foreclosure," warns Elizabeth Warren, the Chair of the Congressional Oversight Panel. 
• "[T]the number of foreclosed homes in the U.S. last year increased to a record 2.8 million, a 21% rise over 2008 and 120% over 2007, according to a new report from Irvine (Calif.)-based RealtyTrac," reported Business Week.

Analysts increasingly attribute the current wave of foreclosures to continuing high levels of unemployment. In the words of attorney David Lebowitz, who represents homeowners in the hard-hit industrial city of Kenosha, Wis., "We will not start seeing improvement in foreclosure rates until we see improvement in the employment picture."

Another major factor is healthcare cost burdens, which are a factor in almost half of all foreclosures. A 2008 study, called "Get Sick, Get Out," led by Christopher T. Robertson of Harvard Law School, concluded that "half of all foreclosures have medical causes, and we estimate that medical crises put 1.5 million Americans in jeopardy of losing their homes last year."

If the Obama healthcare bill passes this week, one of its most helpful provisions--the prohibition on preexisting conditions--will not provide much aid to hard-pressed families. It turns out that the pre-existing conditions ban will apply only to the young for the next four years, and penalties for insurers violating this rule are disturbingly weak, as documentarian Michael Moore, director of SiCKO"  which examined U.S. healthcare, has noted on MSNBC's Countdown.

Moreover, the Obama administration's programs to fight foreclosure have been largely ineffectual. One key provision sought by Obama--giving bankruptcy judges the power to "cramdown" the amount of principal owed by homeowners--was killed thanks to the efforts of conservative Democrats feeling more compassion for banks than families about to lose their homes, like Evan Bayh, whose number one contributor throughout his career was Goldman Sachs.

BANKS 'OWN THE PLACE'

The move prompted Illinois Sen. Dick Durbin to remark, "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Neither of two key Obama Administration plans have been even minimally effective in helping families to stay in their homes, reports the Huffington Post's Shahin Nasiripour. Clearly, the cram-down feature would have helped in making both programs more successful. As Nasiripour reports, not a single homeowner has been rescued by one program:

Nearly a year after the Obama administration announced a plan to help up to 1.5 million struggling homeowners modify their second mortgages, not a single homeowner has gotten any assistance.

The program, a part of the administration's $75 billion anti-foreclosure initiative, was supposed to induce mortgage servicers to coordinate payment reductions on additional mortgages when the first mortgage is modified under the administration's Home Affordable Modification Program.

But it's never gotten off the ground.

Another program has provided real help to only one-third of homeowners in trouble, rather than the 75% expected, Nisiripour found:

Only about a third of the homeowners who have successfully completed the trial period of the Obama administration's mortgage modification program have been offered permanent relief, according to new federal data obtained by the Huffington Post.

The conversion rate -- about 33 percent -- is woefully short of what the Treasury Department had forecast. Treasury thought the rate would be "ranging up to 75 percent," Herbert M. Allison Jr., assistant secretary for financial stability, told the Congressional Oversight Panel in October.

The other two-thirds of homeowners who have gone through the trial program and made the necessary payments remain in limbo. Some of those homeowners -- more than 350,000 of them -- will ultimately lose out on the kind of relief the administration has repeatedly promised: averting foreclosure through lower monthly payments….

The weakness of the anti-foreclosure programs has angered Rep. Dennis Kucinich (D-Ohio), chairman of House Oversight's Domestic Policy subcommittee, who argued that the Treasury Department isn't displaying nearly as much concern to homeowners as it does to Wall Street.

Treasury has been very slow to use the authority provided by Congress... to help keep homeowners in their homes. And this contrasts with the emergency with which both [the Bush and Obama] administrations have worked to bail out the large financial institutions.

Kucinich states that only one effective solution remains, and that is a government role in forcing lenders to take reductions in the principal that they are demanding. In other words, only "cramdowns" will avert an even larger foreclosure crisis:

I've come to the reluctant conclusion that the only way to accelerate the program and also provide adequate incentives for homeowners who sacrifice to stay in their own homes is through permanent, locally-tailored, unconditional reductions in mortgage principal.

While a sufficient number of Senate Dems earlier blocked the cram-down procedure under which lenders could be forced to sacrifice part of the prinicipal, these conservative Democrats will come under severe new pressures if foreclosures continue—and as the November mid-term elections draw near.