MAKING SEN$E -- December 31, 2010 at 12:43 PM ET
Alyssa Katz: How Government Is Failing the Homeowner
We last spoke with journalist and author Alyssa Katz back in October 2009. She had just finished writing "Our Lot," a book on the history of America's housing market.
"The issue is that the investors and investment banks that finance these mortgages are the financial institutions that Treasury has been bailing out with TARP," Katz said at the time. "It's their near-collapse that has been so devastating to the economy. So, who gets to stay in the lifeboat?"
More than two years after the crisis, the debate still rages: who does? Our viewer mail and comments, for example, are split on the "justice" of helping (bailing out) homeowners.
We recently addressed that issue and checked back in with one homeowner we had visited with Katz, Antoinette Coffi-Ahibo, whose first mortgage was modified; her second mortgage, for $130,000, almost completely forgiven. So, happily, she gets to keep her family in her home. We thought we'd check back in with Katz as well.
"In the past year we have seen the overall failure of the government-sponsored loan modification programs to make much of a dent in the foreclosure crisis," Katz said in an interview from New York City. "Over-appraised property, such as Jamaica, Queens, make it impossible for most homeowners to refinance their mortgages."
As to the $119,000 loss that the holders of the second mortgage took, Katz pointed out that "the goal of these [government] programs was to help the homeowner, but to also help the investors in these mortgage-backed securities so that they [continue to be] paid...There's a debt out there and investors have expected this cash flow month after month and year after year. Most [of the loss] is borne by those investors."
It's easy to blame those investors, said Katz: they seem faceless, uncaring, interested only in the bottom line. But without them, where would the economy be?
"Pension funds, insurance companies, sovereign wealth funds -- these are all examples of investors," Katz said. "One reason -- the reason -- we have seen such seemingly timid responses from the Department of Treasury and the Obama administration is because of the losses it would force on investors." Losses -- and fears of further losses -- that could again paralyze the global economy, as it did post-Lehman.
"You have the left now asking the administration, 'Why can't you do more for home owners?' And it is a very reasonable question; they probably could do more. But Treasury is first and foremost concerned with stability of the financial system."
But for homeowners like Coffi-Ahibo, whose first mortgage is actually higher now (due to back payments added to the principal), a loan modification is not necessarily a handout.
Lenders are extending the period over which a homeowner pays off debt. Borrowers may get a lower interest rate temporarily, but in the end they may be more indebted than they originally were.
This gives homeowners time to get finances in order and time to hope property values go up. But what this doesn't help is the overall problem of complete uncertainty about what happens next: real questions are looming about mortgage credit moving forward.
Nothing has replaced home ownership as a potential wealth-building machine. We need to build stability and wealth for communities and the middle class.
In Katz's view, we haven't.