Two years ago, a homeowner from the former Motor City described watering and mowing the lawn of an abandoned home next door. She hoped to keep out potential trespassers, preserve the value of her home, and maintain some semblance of normalcy in a once-thriving neighborhood. It seemed at the time to be a tale from a distant land, a desperate, broken corner of America where unemployment hovers between 30-50%. An exception.
A few weeks ago, in Denver (unemployment: 8%) a homeowner in one of the city’s newest, most vibrant neighborhoods found himself in a similar situation. Wells Fargo Mortgage had (reluctantly) become the new neighbor after the previous resident left, taking not just the family, but also most of the appliances and fixtures. The abandoned lawn had reached knee-height and the bushes had grown out over the sidewalk. The police had been called at least once regarding suspicious activity. Detroit had arrived next door.
So you mow your neighbor’s yard and trim back their bushes because it must be done and you tell your friends about the phenomenal deal, a house selling for just 60% of its 2006 purchase price. You cringe when the appraisers tell you what they guess your house might be worth and you make peace with realizing that your reliable American mobility is neither. And it’s not all bad, because Denver is not such a bad city in which to be stuck; it’s just strange accepting such a concept.
That’s the easy part.
The hard part comes when you open the paper to find that many Americans have been living rent-free for many months (“The Stealth Stimulus of Defaulters Living for Free,” Wall Street Journal , November 1, 2010). According to LPS Analytics, the average borrower whose home is in the foreclosure process has not made a payment in 16 months. That’s 1.33 years. These borrowers are still living in their homes but not paying to do so. Nationwide, the WSJ estimates that the situation equates to about $2.6 billion per month in rent-free housing. That’s a lot of revenue not being paid by borrowers or received by lenders, many of whom have recently been kept afloat by taxpayers. The situation drives a complex set of new social conditions that raise innumerable questions.
I. Rent-Free Residents
Some find good news in the situation, arguing that perhaps some of that money is enabling people to buy food and other necessaries during a difficult time, or to sock savings away for when they are finally compelled to move out. In truth, no one knows how that money is being spent, but ideally it is indeed buying people some time on meeting basic needs.
· Assuming that several million American families are currently living rent free, what happens when they can no longer do so? Where will they go?
· If the banks are currently subsidizing the living arrangements of these millions, then who will subsidize them going forward when they no longer are allowed to live in the homes? Nonprofit organizations such as Rescue Missions and the Salvation Army that already face capacity and funding constraints? Municipalities already overwhelmed by financial obligations? Friends and relatives already under strain? No one?
II. Banks as Homeowners
Banks now own 1 million homes in the US. Another 5.2 million homes are either in the foreclosure process or at least a few months late on mortgage payments.
· What happens as banks own an ever increasing part of the residential real estate market?
· How might this change their relationship to the communities they serve around the country?
· Assuming that many banks are striving to get these properties off their books as quickly as possible, how does their fire-sale pricing impair the broader housing market?
· Since banks remain a primary source of mortgage financing, what does it mean that they are potentially lending to buyers who seek to buy homes from the bank’s own inventory?
· If there are about 75 million owner occupied homes in the US (US Census, 3Q2010) and somewhere north of 5 million are under severe financial stress so far, then aren’t we farther from the end of this crisis than the beginning?
III. The Paperwork Fiasco
Bank of America now services over 14 million loans, 1.3 million of which are at least 60 days late on mortgage payments (“BofA Tries to Untangle Files,” WSJ, 11/1/10). Regulators and some state Attorneys General, however, have ordered Bank of America and other lenders to review the paperwork on hundreds of thousands of foreclosures already in process, alleging that some paperwork may not be 100% complete due to sloppy record-keeping during the height of the mortgage boom, especially at firms like Countrywide which the Treasury Department “strongly encouraged” Bank of America to acquire at the height of the crisis.
· How will slowing down the foreclosure process delay the healing of the residential real estate market?
· What happens if regulators forbid banks from pursuing a material number of foreclosures and yet residents do not fulfill their mortgage payments? Who litigates that situation? Can the bank still sell the home to recoup its loan?
· What obligation does the resident bear if the resident has no intention of becoming the rightful homeowner?
· Given that homeownership would be in limbo, who pays the municipal taxes? If no one does, how does this compound woes already faced by many municipalities? What recourse do the municipalities have, if any? Whose authority trumps whose—the AG’s office, banking regulators, county court, arbitrators…?
All three of these themes reflect a rapidly and dramatically changing culture of homeownership in America. As a society we are fundamentally altering the relationship between regulators and lenders, lenders and borrowers, and homeowners and their neighbors. No one party is explicitly driving this process; thus no one party can be blamed or held accountable, nor can any one party lead us out of this morass. As is the case with most pandemics, there are many actors involved, each confronted by a set of seemingly insurmountable challenges, and there are many intangibles that defy modeling or regulating.
In every neighborhood, there are good people struggling through these difficult circumstances, people who may not have told their closest friends that they are on the brink of losing their homes. It’s a sobering time.
We agree that there are many critical issues in Washington and in state houses around the country that require addressing, but we would argue that a far more concentrated and concerted effort on the housing crisis from courageous political and banking leaders could do more to turn the mood of Americans than almost anything else. For when a people are unstable in their homes, the rest of their lives are tossed into tumult. Workplaces, schools, neighborhoods, houses of worship—all suffer when people do not have a place. There have always been those amongst us without a home, but the number of those who are no longer secure in their home is higher than it has been in decades.
Printing money will not change the fundamental structural shifts in America’s relationship with our homes, nor restore confidence in an essential element of the American Dream. We need more. We need brave leadership. We need a Midway, an Inchon. We need Washington to cross the Delaware in the dead of winter against all odds to take Trenton. We need a win and we need it to be at home. Or at least next door.