The Foreclosure Crisis

It hit homeowners hard,
Thousands in Michigan still face foreclosure

1) Extent of the Crisis

a) Michigan Foreclosures
* 100,000 Michigan households were foreclosed in 2010 according to the Center for Responsible Lending.
* Foreclosure starts were up 66% last year compared to 2006.
* 17,000 Michigan homes in January of 2011 received a new foreclosure filing (notice of default, auction, or bank repossession) according to RealtyTrac, a statewide total surpassed by only California and Florida.

b) Wayne County Foreclosures
* 4,465 Wayne County homes received new foreclosure filings in January of 2011 according to RealtyTrac—  more than a quarter of Michigan’s total.
* 10,700 homes in Wayne County received notice of foreclosure auction over the 6-month period ending in January of this year, averaging more than 400 a week.

c) Homelessness
* An estimated 100,000 people were homeless statewide in 2009, a 28% increase since 2007 according to the most recent report from the Campaign to End Homelessness.
* 35,000 of the homeless were concentrated in the Detroit metropolitan area.
* Half of the homeless families and individuals in the Detroit area were homeless for the first time and 84% had been evicted following job loss or illness.

d) Property Values
* 3.2 million Michigan homes have experienced a foreclosure-related loss in value according to the Center for Responsible Lending, with the statewide loss between 2009-2012 projected at $20.3 billion. 
* The Detroit metropolitan area has experienced 18 straight quarters of declining home prices through the third quarter of 2010 according to the Federal Housing Finance Agency.
* Foreclosed homes sell for $38,000 in Wayne County and less than $11,000 in Detroit (RealtyTrac).

2) Causes of the Crisis

a) Predatory “Sub-Prime” Loans
* Wall Street banks wanted to buy mortgages and bundle them into bonds to sell to wealthy investors and pension funds. To meet this growing demand, mortgage originators like Countrywide and Ameriquest engaged in predatory lending practices that saddled unsuspecting customers, particularly the elderly and minorities, with adjustable rate mortgages on terms they could never repay.
* Mortgage originators then escaped the moral hazard of these fraudulent practices by selling their sub-prime loans to the banks, which bundled them into bonds and derivatives.
* The foreclosure rate on sub-prime mortgages peaked at a rate of 23% in the Detroit metropolitan area in 2008— the highest in the nation according to the Office of the Comptroller of the Currency.

b) Bailout
* When layoffs and the spike in adjustable-rate mortgages forced millions of homeowners into delinquency on their loans, the bonds and unregulated “derivatives” based on these mortgages lost value. Banks and insurance companies holding such “toxic” assets lost billions.
* The Economic Stabilization Act of  2008 provided these Wall Street financial corporations with a $700 billion taxpayer-financed bailout.
* Because half of all mortgages are insured by the federal government through Fannie Mae, Freddie Mac, and the FHA, taxpayers continue to provide these banks with a “silent bailout” that pays them the full value of the mortgage loan at foreclosure, rather than the lower market value.
c) Fraud at Foreclosure
* Wall Street banks that bought mortgages and bundled them into securities created their own unregulated registry, the Mortgage Electronic Registration System (MERS) to avoid the time and expense of properly documenting these transfers at the county courthouse.
* When homeowners faced with foreclosure demand documentary proof of who holds the mortgage, many banks and mortgage servicers resort to fraud, including the “robo signing” of affidavits claiming legal standing.

3) Remedies to the Crisis

a) Citizen action --on home page you can see how we are making a difference!

b) False Starts
* Government programs to promote mortgage modifications and discourage foreclosure have failed to protect homeowners. As of December, 2010, the federal government’s Making Home Affordable Program reported only 10,673 permanent loan modifications over the preceding two years in the Detroit-Warren-Livonia metropolitan area, representing a small fraction of the total households in need.
* A senior economist for the Federal Reserve Bank publicly describes government programs promoting loan modifications as “three years of failed policy,” noting that banks regard modifications as too expensive compared to foreclosure (New York Times, 26 October 2010).
* Recent declines in foreclosure activity are widely regarded as temporary, caused by public scandal following revelations of fraud in loan documentation. (“Facing Scrutiny, Banks Slow Pace of Foreclosures, New York Times, 8 January 2011).
* RealtyTrac predicts that the housing market won’t see significant improvement until 2013, with foreclosures driven by high unemployment as well as toxic loans.

c) Moratorium on Foreclosures
* The Michigan legislature passed a Mortgage Moratorium Act in the 1930s (Act 98, Public Acts of 1933). The Act suspended foreclosures for five years during the Great Depression, during which time judges set reasonable payment levels for home occupants based on ability to pay. The US Supreme Court upheld the legality of this suspension in a 1934 ruling on a similar moratorium in Minnesota.
* In the current economic crisis, with the proposed defunding of public services, taxation of pensions, and abolition of the Earned Income Tax Credit, the pressure on many homeowners will intensify. To protect neighborhoods and homeowners from the fraudulent and unlawful practices that are driving the foreclosure crisis, government at all levels should suspend foreclosures and sheriff’s auctions of occupied residential housing for up to two years, allowing sufficient time for mortgage lenders to come into compliance with federal and state statutes, regulations, contractual obligations and guidelines governing mortgage loans and foreclosures.
* During such a moratorium, the state—by the Governor’s executive order, by an act of the legislature, or by ballot initiative— can establish a process, as in the 1933 law, by which distressed homeowners can apply to a court of competent jurisdiction to set a reasonable payment based on ability to pay.