Bankruptcy

LOS ANGELES – Recognizing the need to assist Los Angeles residents struggling with medical debt, healthcare practitioners today joined financial services providers and community groups to discuss how best to implement the Affordable Care Act in Los Angeles and strategies for keeping Angelenos out of debt. Speakers also highlighted options for those plagued by medical debt.

A report released today by the Pew Research Center finds that the Great Recession has worsened an already-widening gap in net worth between Whites, Latinos, and Blacks. Using data from the Survey of Income and Program Participation (SIPP), researchers found that between 2005 and 2009, in percentage terms, “inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, compared with just 16% among white households.”

Low personal savings rates are just one of the ways in which the recent and pervasive Great Recession has highlighted the financial fragility of families, especially among lower-income Americans. Hopefully you were fortunate to join us on Wednesday for a convening of leading experts to discuss the road from financial fragility to financial stability. Entitled Rebuilding the Road to Financial Stability, the convening highlighted potholes along this road by citing evidence for just how financially fragile lower-income Americans are, introducing strategies to repair existing potholes, and suggesting ways in which we can build upon repairs to maintain the road.

Somewhere between addressing predatory lending, mortgage origination, and what to do with the onslaught of vacant and abandoned properties, we failed to really address everything in the middle. Maybe that is a little harsh. Several academics, state Attorneys General, and media outlets reported problems in mortgage servicing, scary trends like the difficulty of reaching someone with authority on the phone or the consistent loss of paperwork.

Last week, I attended the Federal Reserve Community Affairs Research Conference on “The Changing Landscape of Community Development” where researchers from the Fed and Universities around the country shared their most recent findings on the challenges facing low-income communities and community development policy-makers.  The conference covered a wide range of topics from foreclosures to farmers markets with eight discussion panels and keynote speeches by Columbia University professor and aut

The Affordable Care Act (ACA), if implemented as passed, will improve the financial security of Californians, and in particular that of low and middle-income Californians. While reducing the strain of medical bills and health insurance costs on family budgets is a major aim of the legislation, it also offers tools to individuals and communities as they attempt to reduce the “upstream” cost of poor health.

The ACA bridges the health-wealth connection in four major ways:

At our event yesterday, "Mitigating the Impacts of the Current Foreclosure Crisis," Senator Jeff Merkley (D-OR) laid out a convincing case for paying more attention to the ongoing foreclosure crisis, putting distressed homeowners first and supporting homeownership as a goal for America in the future.

Despite the return of the stock market, the housing market remains a mess and is filled with uncertainty. Scores of families across the country are on the cusp of losing their homes and being displaced from their communities. In many cases, foreclosure is a lose-lose-lose proposition, negatively impacting families, lenders, communities (and taxpayers) alike.

But many foreclosures are avoidable. Given the current scale of the problem, where one in four mortgages are underwater and over a million of foreclosures are predicted for this year, we should be stepping up the pace with implementing policies that can put a stop to the wave of mass foreclosures sweeping the country.

One idea that has shown promise is a reform to the foreclosure process which gets all the interested parties in a room to talk and explore renegotiation. Half the states already have a process in place to facilitate mediation but the process can be made more effective if it is inserted into the process automatically as a default. This approach is working where it has been tried and the next challenge is to get the federal government behind the event.

Alon Cohen and some of his colleagues at the Center for American Progress have been talking up this idea. They note that even though none of the parties are under any obligation to settle in mediation, in practice they settle more than half the time. In previous papers they have explored how foreclosure mediation works and its impacts at the state and local level when it is automatically part of the process.

Alon has just released a new paper describing what the federal government can do to support the spread of this innovative and successful practice. It is an important paper and is worth a read by anyone looking for solutions to the current mortgage mess.

His central proposal is that all mortgages backed by the U.S. government should be forced to go through mediation prior to foreclosure. This means Fannie Mae, Freddie Mac, and FHA will require their loan servicers to implement automatic mediation prior to foreclosure. In this way automatic foreclosure mediation will be added to the list of “loss mitigation” activities already required of them. Further, Congress should make clear that judges in federal bankruptcy cases have the power to require parties to mediate mortgage issues, just as they currently order alternative dispute resolution (such as negotiation or mediation) for other issues. Together, these two provisions would impact the large majority of mortgages under threat of foreclosure and create new means to stabilize the housing market.

We've been talking a lot recently about the massive size and on-going nature of the foreclosure problem in the US. Reid Cramer recorded a podcast on solutions to stem the tide, and recorded conversations with Julia Gordon, who called for the involvement of the bankruptcy courts to help, and Alon Cohen, who outlined a simple model with great promise--opt-out mediation. Now Sheila Bair, Chair of the FDIC has thrown her hat into the ring and laid blame on the doorstep of the the mortgage servicing industry.

“Throughout the mortgage crisis, from the earliest days of the subprime credit problem to the current robo-signing controversy, the most persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans. Prompt action to modify unaffordable subprime loans in 2007 could have helped to limit the crisis in its early stages. Instead, we saw one and a half million foreclosures that year...Mortgage servicers have remained behind the curve as the problem has evolved to include underwater mortgages and, now, foreclosure practices that sow confusion and fear on the part of homeowners and fail to fully conform to state and local legal requirements...

Fair dealing with borrowers and adherence to the law are not optional. They must be viewed as mandatory if our servicing and foreclosure process is to function in the interest of all parties concerned.

The bottom line is that we need more modifications and fewer foreclosures. When foreclosure is unavoidable, we need it to be done with all fairness to the borrower and in accordance with the law.”

Wow. For those interested in a calming of rhetoric that's what a DC smackdown looked like before we just started screaming at each other. So what does the Chairman recommend? Here are principles she's putting forward for reform:

1)       That borrowers have a single point of contact with their servicer.

2)       That servicers have adequate staffing and training for effective loss mitigation.

3)       Take opportunities to clear the decks with simplified loan-modification offers in exchange for waivers of claims.

4)       Servicers must deal head-on with the second-lien problem.

5)       There must be independent review of loss-mitigation denials.

6)      Borrowers harmed by past practices must have remedies available to them, "a foreclosure claims commission, modeled on the BP or 9/11 claims commissions, could be set up and funded by servicers to address complaints of homeowners who have wrongly suffered foreclosure through servicer errors."  

Now, by and large that's ambitious, but it hardly seems out of line. However, Chairman Bair felt the need to send a shot across the bow for the industry:

The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them - and the rest of us - even more.

Double snap. I'd recommend reading the Chairman's entire speech, and keeping a close eye on where this proposal goes.