At the top of the year I’m lining up committee and “special project” priorities for 2015. We’ll launch new initiatives this year, but several projects started in 2014 will carry over. One of these projects focuses on foreclosure prevention, specifically mortgage principal reduction as a way to keep people in their homes.
Zillow reports that for 2014 approximately 16% of homes in King County were in negative equity. That means the owner is “underwater” – the mortgage amount is more than the current value of the home. In a subset of those cases the owner is underwater and behind on mortgage payments. In recent months home values in Seattle have risen helping many people rise above the water line, but still too many are left under. Some are weighed down by the lasting effects of pre-recession over-heated home prices. Those prices lead to high mortgages with unsustainable terms. Definitely not the financial security homeownership is supposed to give.
There are ways to assist underwater homeowners and I figure we should put those options into action as aggressively as we can. Councilmember Licata and I have teamed up on this work.
First, we rearranged money in the last quarter of 2014 to fund more aggressive outreach to people underwater and behind on their payments. We know from experience that people have a much better shot at keeping their home — and even at principal reduction in some cases – if they have professional help when facing their lender. No one should try to deal with being underwater or being behind on their mortgage payments or actual foreclosure without the help of a financial advocate. We pushed a quick $150,000 out to community based agencies to contact every homeowner in Seattle we can find who is underwater and behind on payments.
Concurrently, Councilmember Licata and I, with huge help from staff and advocates, started working on how to get a principal reduction fund operating in Seattle. Models for this exist in Boston and in Oregon, so how hard can it be to get something going here?
As it turns out, harder than I originally thought.
Principal reduction is the holy grail of help for underwater home owners. Before the recession too many people signed on for mortgages at unsupportable high values. Court records in too many parts of the country show that many lenders knew this and took advantage.
For many of us principal reduction is the right answer because it’s the yin to the bank bailout yang. Big banks received help, why shouldn’t individual homeowners? Many people in this crisis want to pay their mortgage and can pay a mortgage. They want to keep their home. The combination of aggressive lending and inflated values proved a trap. That trap is bad for individuals, families and neighborhoods.
As you might imagine, principal reduction generally isn’t favored by lenders. However, “solving” for people underwater and behind on their payments should help banks avoid costly foreclosures and, frankly, bad PR. The moral and financial reasons for lenders to consider principal reduction are strong.
So, what have we done do far?
- Late last summer we hired an expert from the Oregon experience to draft a report on how the two existing models in Boston and Oregon work and detail how a Seattle fund could work. This is a document we can share to educate potential operators and funders.
- We’ve met with the operators of the Oregon program. That was super helpful, but also reinforced how complex program set-up and the transactions themselves can be. Also, the Oregon model operates in only four counties in Oregon.
- We’ve met twice with Craft3, a community development financial group, possibly interested in bringing the Oregon model into Washington. Neither the Boston nor Oregon model is operated by the government.
- We’ve briefed representatives from the Washington State Housing Finance Commission and the United States Department of Housing & Urban Development. HUD is especially important because of the way mortgages are insured and who needs to sign off on a repackaged loan.
- We met in October with the State Attorney General to explain the proposal and seek help with funding. We’d need a few million dollars to get going (figure each mortgage re-write involves $200,000-$300,000) and we enquired about national mortgage settlement funds. Washington didn’t receive federal Hardest Hit dollars after the initial mortgage crisis fallout and, so far, dollars from lender settlements that do include Washington have been allocated to non-profits in the state helping homeowners with counseling and legal aid. The door isn’t totally shut here, but there was no magic box of money at the AG’s office.
- With the Seattle Foundation we hosted an information session in early December for lenders, foundations and other institutions who might be interested in supporting this project. The Oregon program operators attended and explained how the principal reduction transactions work and how the new loans are then bundled and sold to responsible banks for long-term holding and servicing (someone has to mail you your payment coupon every month). HomeStreet, Bank of America, Washington Federal, BECU and Wells Fargo attended this first session and asked serious questions about risk, eligibility screening, attractiveness of the loans on the secondary market and more. We will be continuing these conversations in the next couple of months.
- Staff is continuously working to get information about how national mortgage settlement dollars are being spent to see if we can attract unallocated dollars to this proposal.
In the meantime, the future of the Oregon program has become murky. Currently, the program revolves the money – re-writing troubled mortgages, selling them to a reputable bank and then using that money from the sale to go out and re-write more mortgages. However, the federal funding that they have been revolving is officially due back to the feds at the end of 2017. So, while they are asking the federal Treasury for permission to keep using and revolving the funds, our nearest great model may be in peril unless other funds become available.
So why not switch our focus to the Boston model? We might have to do that. The Beantown model utilizes grants and loans from individuals and foundations through a community-based fund. No matter which model we adopt, finding the funding is the top challenge.
A number of people work hard on this issue, including an advocacy group called SAFE (Standing Against Foreclosure and Eviction). SAFE would like Seattle to condemn underwater mortgages, repackage the loans at lesser amounts, and get them back to the homeowner who was underwater. This would be a way of giving direct relief to homeowners who have struggled to get help from the banks and financiers, some of whom knew full well that the mortgages they were writing would prove too heavy and bring down individuals and families all over the country.
Unfortunately, mortgage law is heavily regulated at the federal level and any attempt by a city to condemn a mortgage (not the home, but the mortgage) would end up in the courts for years. A financial boon for attorneys, but not for homeowners.
And that’s where we are as we start 2015. Yes, rising home values mean that as of last month fewer people in Seattle are underwater, but there are still many, many people in need and I’m committed to doing what I can to help.