The housing crash was an opportunity for America. Obama blew it. | Opinion

Aaron Glantz | Detroit Free Press

The Great Recession is more than a decade old. But Detroit and other communities are still struggling to recover from the housing crisis it precipitated.

A new book by investigative journalist Aaron Glantz, "HOMEWRECKERS: How a Gang of Wall Street Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists Suckered Millions Out of Their Homes and Demolished the American Dream," explains how familiar figures like Steve Mnuchin and Wilbur Ross profited from the crisis and the many ways that the Obama administration failed homeowners and communities. The adaptation that follows is just one glaring example.

Glantz will discuss his book at 6 p.m. on Nov. 21 at the main branch of the Detroit Public Library at a special event sponsored by Outlier Media, a Detroit-based journalism initiative that focuses on housing and utilities. To hear Outlier Executive Editor Sarah Alvarez interview Glantz, RSVP at outliermedia.org.

When the housing tsunami made landfall in 2008, it struck primarily people who had taken out “bad loans” from mortgage lenders such as IndyMac and Ameriquest. Their loans featured high interest rates, incomprehensible terms, and balloon payments. When housing prices softened, these homeowners were unable to refinance out of these predatory products and quickly faced foreclosure.

Then, in 2010, a second wave hit, jeopardizing the dream of home ownership for millions of Americans who were out of work. By then, more than six million people had been unemployed for more than six months, the highest number since the government began keeping records in 1948. In 2011 a million more Americans would lose their homes.

Through all this, the administration of Barack Obama, like George W. Bush’s before him, did very little to stem the tide of foreclosures. First, Congress passed a massive bank bailout that did little to help individual borrowers. The terms of the deals the federal government brokered afterward, like the sale of IndyMac to Steve Mnuchin’s group of hedge fund managers, actuallyencouraged foreclosure.

Then, as the number of vacant and foreclosed homes mounted, the federal government did almost nothing to prevent communities from collapsing entirely. The Neighborhood Stabilization Program — the most significant federal initiative to deal with the plague of blight — extended grants to hard-hit communities to provide “emergency assistance to stabilize communities with high rates of abandoned and foreclosed homes.”

But the amount of money appropriated was laughably small. A typical NSP grant went to Riverside, California, where 14,000 homes were lost to foreclosure. The city received just $6.5 million — barely enough to buy 50 homes, fix them up, and sell them to new families. In many cities, foreclosures were piling up so fast that by the time they fixed up one vacant home, two more on the same block would be seized by the banks.

The New Deal solution

This glut of bank-owned property was not inevitable. During the Great Depression, New Deal programs such as the Home Owners’ Loan Corporation had fought valiantly to prevent foreclosure. The HOLC bought bad loans off banks for their true value and issued new, long-term mortgages loans that kept borrowers in their homes. It also was extremely lenient with homeowners who had trouble making their payments.

“Every possible forbearance was exercised before foreclosure was authorized,” the HOLC said in its final report to Congress in 1952. In stark contrast to modern banks like Steve Mnuchin’s OneWest, which put loans in foreclosure after a borrower fell 60 days behind, the HOLC usually didn’t start the foreclosure process until a borrower had been delinquent for a year or more. In about a quarter of cases, the HOLC went even further, lowering homeowners’ monthly payments by giving them five more years to pay off the debt and lowering their interest rate in the segregated neighborhoods where it operated.

The HOLC ended up acquiring nearly 200,000 properties through foreclosure. Even in those cases, however, it did what it could to help the community. The government bank kept the homes occupied and well maintained. It employed a small army of inspectors and contractors to fix those homes and rent them out until new buyers could be found.

According to the HOLC’s final report, “The practice of ‘dumping’ properties was not followed on the premise that such a policy would have weakened the market, which, in general, did not become stabilized until the effects of the defense industries in 1939 and 1940 were reflected in the national economy.”

Restoring the dream, for some

Eventually more than 90 percent of those homes were sold to families who paid for the property over time through installments. The sale price was almost always extremely close to the amount of the original loan.

The system left little room for speculators. Communities were stabilized, and taxpayers got their money back.

Unfortunately, the benefits of the HOLC program accrued almost exclusively to white homebuyers in segregated communities.The program was implemented in one of the most racist ways imaginable: Through the practice of government-sanctioned “redlining,” government employees literally drew lines on maps of every major American city and and labeled neighborhoods “infiltrated by Negroes” or “threatened with Negro encroachment.” too “hazardous” to lend in. This exacerbated the already great wealth gap between the races — and is a big reason why the average white family is now worth ten times as much as the average black one.

Still, the home ownership rate surged, and an era of middle-class shared prosperity blossomed for decades — at least in the white neighborhoods where the HOLC operated.

The Bush and Obama administrations could have played the same stabilizing role during after the Great Recession of 2008 — which, despite the pain, was in most ways far less severe than the Great Depression. In fact, they could have done one better by throwing the government’s support behind homeowners without the racial restrictions of the New Deal, using the power of the purse to redress past discrimination.

Just as the Home Owners’ Loan Corporation came to own hundreds of thousands of homes in the 1930s, so, too, did the federal government inadvertently become a major landlord during the post-2008 housing bust. Fannie Mae and Freddie Mac, the government-chartered mortgage companies Franklin Roosevelt and Richard Nixon, respectively, set up to help Americans buy homes, had enormous market power. In an era where banks had been transformed from lenders to sales agents, where they no longer held most of the mortgages they made on their own books, Fannie and Freddie were the largest, most important buyers.

This meant that when loans went bad and banks foreclosed, Uncle Sam was often stuck holding the house. By August 2011, the federal government owned 248,000 properties — nearly a third of all of the nation’s repossessed and unsold homes.

In search of a quick fix

But unlike the Home Owners’ Loan Corporation generations earlier, the federal government showed no interest in going through the time-consuming process of finding individual families who might buy the homes to live in them. Instead, the feds tried to dump them.

A 2011 audit by the Government Accountability Office reported that Fannie Mae and Freddie Mac spent nearly $1 billion maintaining properties it had assumed though foreclosure the year before. That sounds like a lot until one considers the sheer number of homes that had fallen into the government’s clutches. The total per property averaged just $1,744 — and 40 percent of that went to boarding up homes and carrying away junk cars and other trash.

“There was always a desire for a quick fix,” said housing expert Julia Gordon, who managed a team of policy analysts for the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. There were many meetings, she said, “usually a bunch of bureaucrats in a room, usually with some kind of political leader representation. A lot of decisions were driven by convenience. Everybody just wanted to keep things simple, and keeping simple always means selling things to Wall Street.”

In August 2011 the government moved to unload the hundreds of thousands of properties it had acquired through foreclosures. The Treasury Department, the Federal Housing Administration, and the Federal Housing Finance Agency put out a joint request for input, asking the public for the best way to dispose of foreclosed homes.

Consumer advocates and Realtors argued that they should be sold to individuals to stabilize neighborhoods, and that banks, which had received huge taxpayer bailouts, should be forced to lend to prospective home buyers. In a town hall meeting in Atkinson, Illinois that summer, President Obama seemed to endorse that idea:

"A lot of banks have now recovered, but they’re not lending the way they used to," Obama said. "Now, they need to have a slightly tighter lending criteria than they used to have, obviously, because that was the part of the reason that we had that housing bubble. But one of the things we’ve talked about is, can we encourage banks now to take a look at customers who are good credit risks but are being unfairly punished as a consequence of what happened overall?”

Ron Phillips, the president of the National Association of Realtors, told the federal housing agencies they should follow through on the president’s rhetoric. In disposing of hundreds of thousands of foreclosed homes on its books, he said, the feds should push banks to make loans to responsible families. Selling homes individually would “maximize recovery on the assets and minimize the impact on housing values,” while “selling in bulk to large national investors at deep discounts only works to further consolidate a large section of the housing market into the hands of fewer market participants."

A coalition that included the American Civil Liberties Union and the Lawyers’ Committee for Civil Rights Under Law offered an alternative vision: The federal government should turn its suddenly vast inventory of foreclosed homes into affordable housing for the poor. Local governments and nonprofits should be given first refusal, and if private investors purchase the homes, they should be required to set aside a portion of the homes they bought to be rented out to the poor at affordable prices. The government’s unexpected inventory of foreclosed homes offered a “once-in-a-generation opportunity” to provide affordable, suburban rentals to people of all income levels and racial backgrounds.

An opportunity squandered

Either of these two options — helping families buy homes so they could build wealth, or getting the homes into the hands of affordable-housing nonprofits so that those same families could save money on rent — would have helped working-class America recover from the pain of the bust.

But the Obama administration didn’t embrace either one. Instead, it opted once again for a rescue plan that would concentrate the wealth of many in the hands of a few, selling the houses in bulk as rentals, in huge blocks of 500 to 10,000 homes valued at between $50 million and $1 billion.

One maxim of investing, especially relevant in real estate, is that a smart businessman buys low and sells high. The Obama administration did the opposite. In February 2012, as housing prices bottomed out at the lowest level of the Great Recession, the Federal Housing Finance Agency announced it would go through with its plan and start selling thousands of houses in bulk.

There were very few conditions attached. For example, corporate bidders were supposed to show that they knew how to manage property and present a plan for community engagement. The agency’s inspector would later report that these conditions were largely ignored.

Sales agreements released to the public by Fannie Mae run hundreds of pages and include a broad range of financial and legal conditions but no promises that the buyer would maintain the properties, keep housing affordable, or engage with the community.

Adapted from the book "HOMEWRECKERS: How a Gang of Wall Street Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists Suckered Millions Out of Their Homes and Demolished the American Dream," by Aaron Glantz. Copyright © 2019 by Aaron Glantz. From Custom House, a line of books from William Morrow/HarperCollins Publishers. Reprinted by permission.