Commanding the waves to recede

FORT MYERS, Fla.-The Fort Myers metropolitan area, lapped by the waves of the Gulf of Mexico, is neck and neck with desert-clime Las Vegas in a race to become the abandoned home capital of America. Almost one out of every eight households in those two areas received foreclosure notes in 2009. When President Obama in his State of the Union address on the evening of Jan. 27 pledged to "step up refinancing so that homeowners can move into more affordable mortgages," people here listened.

Earlier that day, though, the complexities of coming through on that pledge were becoming apparent. The Harborside Event Center here filled up with 1,000 mortgage-troubled homeowners who came for a HUD-sponsored workshop on "making home affordable." Counselors from the Home Ownership Resource Center, a Fort Myers nonprofit that offered individualized help to 711 homeowners last year, spent the day prepping 78 distressed residents on how to talk to lenders. They saw that some may get help, but reported that others have homes far, far "underwater"-worth far less than they paid for them-and "they're extremely angry."

Five days later Eddie Felton, the Center's executive director, showed me around the two hardest-hit areas of the Ft. Myers metropolitan area, Lehigh Acres on the east and Cape Coral on the west: "That house is empty . . . that house is empty . . . that house was robbed . . . someone set that house on fire." Felton, a 26-year Navy veteran who started offering counseling about housing two years ago, said people are calling and saying "Obama promised" this or that: "But he can't come through without wrecking the whole system. Seems to me, if you can't produce, don't give people false hopes."

We drove by blocks with abandoned homes purchased several years ago for $250,000-$300,000, three times what they sell for now, if they sell at all. Those homes are magnets for criminals who steal refrigerators, ovens, air conditioning systems, and copper pipes. Residents who keep up their payments see the value of their homes decline further as their neighborhoods become depopulated. Felton said, "I think Obama's sincere, but I wish his people would come out from behind their desks, see what's going on, and listen to people who know something besides theories."

We drove through sections that are ghost towns for human beings but not for weeds, which in this climate grow quickly and in a year can make a suburb look desolate. Felton noted, "The president gets up on TV and says his program will help people stay in their homes. It won't. It's up to the lending institutions. People who want to refinance need some equity, but most of the people in need have no equity in their homes. Should the banks just hand out money?" The New York Times on Feb. 2 reported that it would cost $745 billion to bring underwater homeowners to a break-even point.

The suburbs have been hit hard, but many purchasers of prime spots are also in trouble. Felton pointed out one high-rise condo on the Caloosahatchee River near downtown Fort Myers: Five units occupied, and the other 95 of them might as well have "welcome, thieves" doormats. He says more people are just walking away from their investments, breaking their contract and ruining their credit rating but saving money that they can then use for rent. "That's tough, but it wouldn't help for the federal government to force the lenders to write off every debt. The banks would be bankrupt. Besides, you'd have a lot of people taking advantage. Next time there'd be even more recklessness."

We peered into one gated community where most houses have five bedrooms, four baths, and no people. Felton is not a fan of one-size-fits-all approaches where Washington dictates-in the latest formulation-that people should not pay more than 31 percent of their income for housing: "Here, we do face-to-face. Everyone's unique. . . . We tell homeowners to bring their financial statements-check stubs, W-2s for the last two years, everything, and work out with them ways to cut expenses. We find out what's feasible for them to pay each month, and then they request forbearance from the lenders' loss mitigation departments."

We stopped in front of a Bank of America branch (see sidebar below) where Felton said he tries to "establish a trust factor with lending institutions. We're the third party: We work both sides of the street and try to help both sides arrive at a solution that helps both." He doesn't demonize lending institutions: "They don't want to foreclose homes or hold onto a bunch of them. They know it's better to have someone living in a house than to have it abandoned. . . . They're overwhelmed. Everyone's overwhelmed. In Fort Myers 26,000 people in some form of foreclosure are waiting to see the judges-they're overwhelmed too. . . . Obama? He's trying to do the right thing, but he needs guidance."

Later, I looked around one area, the Brookshire development in south Fort Myers, that hasn't been hit as hard as others. A resident there, Duane Clairmore, 72, does not fit the stereotype of "deadbeat" homeowners who put almost nothing down, lied about their income, and received loans (and lived in homes) much larger than they could afford. Clairmore, a retired Western Union manager from Wisconsin, was married for 36 years. His wife died six years ago. A year later he used much of his life's savings for a $75,000 down payment on a $200,000, two-bedroom (1,114 square feet) stucco and cement Brookshire home. Asphalt roof. Attached garage. Well-maintained. Nothing fancy.

In short, Clairmore wasn't reckless or extravagant. He did things right-except that he bought at the wrong time and signed onto an adjustable rate mortgage (ARM) that he says he did not fully understand. Clairmore's immediate financial problem is that he has $2,000 of income per month and pays $830 for his mortgage-but he fears a May reset in the adjustable rate that he says would increase his monthly payment by $200 or so. That's beyond what he says he can afford. He'd prefer to sell his home, but it is now appraised for only $121,000. The average Brookshire sale price is $94 per square foot, according to Zillow.com, so by that measure the house may be worth only $104,000.

At this point Clairmore's $75,000 down payment is completely lost, and he owes more than the house is worth. He says he can't afford to stay, but he hasn't been able to sell his home at a price that would pay off the mortgage. He is underwater, but because of his large down payment he's better off than many others: Industry experts predict that by June one of every 10 American homeowners will be in a property worth less than 75 percent of its outstanding mortgage. Some can hang on and hope values will bounce back, but those who lose their jobs or have health problems, etc., have little choice. The number of homes lost through foreclosure and related means was 1.7 million in 2008 and 2 million last year, according to economy.com-with 2.4 million expected this year.

The result for Americans is an ethical, political, and financial problem. Should the federal government rescue Duane Clairmore, whose house lost half its value? What about others whose homes have lost two-thirds? Does Clairmore's 37.5 percent down payment make him more worthy of aid than those who put 0 percent or 3 percent down? Does his signing onto an ARM make him less worthy? If he is bailed out, does that create for other homeowners a "moral hazard," an enticement to make bad deals with the expectation that Washington will offer a new deal?

The Obama administration, siding with the mice while trying not to scare the elephants, keeps fine-tuning its requirements for lenders. Since last April the administration has released new requirements nine times and made 90 clarifications, according to the Mortgage Bankers Association (MBA). On Jan. 27, as Fort Myers residents were lining up for help, the MBA pleaded with the administration to refrain from "endless incremental program changes," since every change "forced mortgage companies to implement new procedures and retrain employees, taking away time that could be spent helping borrowers."

That may be blather, but last month Valparaiso law professor Alan White published research showing that the Obama administration's housing program is producing 33,000 permanent mortgage modifications per month, but "a year ago, the industry was voluntarily and permanently modifying more than 100,000 mortgages per month." White wants the administration to get tougher on lenders, but at this point the Obama program merely seems to have entangled banks and other groups with new yards of red tape. And a larger question looms: Does imposing standardized regulations, instead of allowing variations according to local needs and borrower credit ratings, make things worse rather than better?

Economist Thomas Sowell has described four stages in Washington aggrandizement: Crisis, big government action, failure of government action, bigger government action. In January and early February left-of-center trumpeters were at stage three and demanding stage four, heatedly criticizing the Obama administration for not putting more pressure on lending institutions. ProPublica attacked Bank of America, JPMorgan Chase, CitiMortgage, and Wells Fargo. The Center for Independent Media reported that "a year ago hopes were high that a big push by the government to stop fore­closures would be a great success"-but those hopes have now been dashed. Public Citizen's Consumer Justice Project posted headlines such as "Banks Holding Out" and proposed new government programs to force them into writing down mortgage amounts and monthly payments.

So as we head toward spring, the United States is at an inflection point regarding housing policy, as it has been regarding health care. So far, lenders are not being pushed to issue new mortgages for amounts hugely more than the value of a house-but that would change if Sowell's stage four came marching in. MSNBC opined that "saving a home from foreclosure can be as simple as rewriting a costly, high-rate subprime loan to prevailing mortgage market rates. . . . If that doesn't work, lenders can cut the amount of principal owed." Famous last words: "as simple as."

There's nothing simple here. The Inspector General for the Troubled Asset Relief Program, releasing on Feb. 2 his quarterly report to Congress, expressed concern about a "heads, I win; tails, the Government will bail me out" mentality affecting both homeowners and companies. Without bailouts, will we see more ghost towns?

But what about the experience of WORLD readers like Cheryl, who wrote on worldmag.com, "I myself bought very, very sensibly and I'm still struggling a bit-I don't have surplus funds to bail out others who were less careful with my taxes, lest I lose my own house."

Economics analyst Megan McCardle, concerned with the moral hazard that bailouts create, has a sensible suggestion: "We might start by trying to make it easier to get out of houses, as well as stay in them. Instead of encouraging people to throw their savings into hopeless modifications, maybe the government should be trying to streamline the process of arranging for a short sale so that people can walk away with a little savings in the bank (and on their credit report) to help them get a fresh start." In a real estate short sale, the proceeds fall short of the balance owned on the mortgage loan, but the lender agrees to take a moderate loss rather than go through the slower and more costly foreclosure process. One owner gets out of the house and someone else moves in at a price that person can afford.

The Obama administration, despite campaign rhetoric about "change," is trying to slow down the process of change that is central to free societies and free markets. Many realms now relish stasis. Tenure slows down the process of academic change. Unions slow down change. Compassionate liberalism is about holding on to what we have, and trying, like King Canute, to command the waves to advance no further. Compassionate conservatism, properly understood, is about propelling change. Rather than hanging on to a spot on the sidewalk, build a new life. Rather than hanging on to a single-family home that can't be paid for, rent an apartment. That can be hard, but for generations social mobility has defined an American spirit that creates overreaching (read The Great Gatsby) but also overachieving.

Early this month on Bonita Beach, just south of Fort Myers, two surfers in wetsuits kept falling off their boards and getting back on, fighting the waves but loving them. Nearly a century ago F. Scott Fitzgerald approached the ending of his terrific novel by writing that "Gatsby believed in the green light, the orgastic future that year by year recedes before us." That's the mentality of the housing bubble. But Fitzgerald concluded, "tomorrow we will run faster, stretch out our arms farther. . . . And then one fine morning-So we beat on, boats against the current, borne back ceaselessly into the past." Or into the future.

'The whole process is confusing'

After Ken Kelly saw the value of his California home decline from $600,000 to $350,000, he asked Bank of America (BoA) to renegotiate his loan through the federal Home Affordable Modification Program (HAMP). After bouncing from representative to representative, he sent his paperwork in November, only to be told there was a technical glitch and that he should delay his payments. He says that when he finally received new paperwork, his loan payment had gone up $400 a month to penalize him for the missed payments the bank told him not to pay, and would later increase even more. The new agreement was not a HAMP modification.

"The whole process is confusing," Kelly said. "A lot of the times you don't understand what they're giving you." People Improving Communities through Organizing (PICO), a national network of faith-based community organizations with allies like Sojourners and the Presbyterian Church (U.S.A.), is organizing a national campaign against BoA, accusing it of delaying loan modifications and violating its agreement with the Treasury Department by offering its own modifications instead of using HAMP.

By November 2009, BoA had issued only 98 permanent HAMP modifications although the Treasury Department estimates that 1 million of the 14 million BoA-connected homeowners qualify. PICO affiliates say this number of permanent modifications is dismally low and that BoA is so disorganized that some homeowners have received a loan modification offer on the same day they receive a foreclosure notice. BoA spokesperson Jumana Bauwens said BoA has over 9,000 permanent modifications pending; once it clears the backlog, it promises homeowners will wait only three months for a permanent modification instead of five or six.

While BoA has a low number of completed HAMP loan modifications, it has completed almost 260,000 non-HAMP loan modifications. PICO accuses BoA of breaking its Servicer agreement with the Treasury Department and offering its own loan modifications to homeowners who qualify for HAMP. PICO says some of these modifications are devastating, interest-only modifications where the payment may suddenly double in five years.

Bauwens says BoA only offers its own loan modification if the homeowner doesn't qualify for the HAMP. The offer depends on individual circumstances-a person's debt or employment-and may reduce the rate or lengthen the terms of the loan. Although the foreclosure process may continue while someone is seeking a permanent loan modification, BoA won't sell the house. If someone drops out of HAMP or doesn't qualify, she said, "We're not going to take these people and throw them into foreclosure."