Communities to Banks: You Can Fix the Housing Crisis

Banks caused the housing crisis — and the financial crash which threw millions out of their jobs — and they can fix it, according to a new report.

By writing down underwater mortgages to market value – using a relatively small portion of bailout financing they’ve received – banks could put a floor on the housing market, stem spiraling foreclosures, and provide the economy with a badly-needed second stimulus, creating millions of jobs over the next decade, the New Bottom Line Campaign argues in a new analysis.

It was released in Chicago last week at a vacant home on the West Side that’s being rehabbed under a new program — which demonstrates how community pressure can force banks to step up and take responsibility, organizers say.

(And it came out the same day Mayor Rahm Emanuel announced a foreclosure recovery program that includes not one single community on the hard-hit West Side.)

The South Austin Coalition, one of nearly a thousand community organizations nationwide (including Chicago-based National Peoples Action) in the New Bottom Line Campaign, released the report at a home in the Austin community that’s being rehabbed by the Westside Health Authority.

Financing comes from a $2.4 million community restoration fund, won after a long campaign by the Coalition to Save Community Banking that targeted U.S. Bank after it took over the locally-owned Park National Bank in 2009.

WHA is rehabbing three homes in Austin – employing ex-offenders to do the work – andHousing Helpers is rehabbing three homes in Maywood in the first phase of the fund’s operation. It’s a small-scale success that points to what’s needed on a far grander scale, organizers say.

Second stimulus

According to the NBL report, 23 percent of American homeowners owe a total of $709 billion more on their mortgages than the market value of their homes. Writing down underwater mortgages to market value with 30-year fixed-rate mortgages would cost banks $70 billion a year, money that would instead go into consumer spending. The average homeowner would see mortgage payments reduced by $6,500 a year.

Injecting that kind of increased consumer demand into the economy would fuel a million additional jobs a year, the report estimates. It would constitute a second stimulus for the economy, at no cost to taxpayers – indeed, increased economic activity would add to government revenues and reduce the deficit. NBL calls it the “win-win solution.”

In Illinois, with 483,517 underwater homeowners (21.7 percent of the total) owing $29 billion more than their homes are worth, NBL’s proposal would create nearly 43,000 new jobs a year, according to the report.

As it is, the housing crisis and jobs crisis continuously reinforce each other, creating a vicious cycle, according to the report. Federal foreclosure programs, focused largely on protecting banks (and shying away from principal reduction), have fallen far short. Economic stimulus efforts have averted freefall but failed to spur sufficient growth.

“Working families across the country have seen their home values plummet, have had their life savings wiped clean, have been powerless to help when their loved ones lost their jobs, and in too many cases watched helplessly while they lost their homes to banks that continue to post billion-dollar pro?ts,” according to the report.

And banks are sitting on unprecedented cash reserves, with the top six banks reporting $1.64 trillion.

Banks can afford it

Writing down underwater mortgages would help investors who back mortgage loans, who typically come out ahead when foreclosures are avoided with loan mods including principal reduction (mortgage servicers, on the other hand, take in huge fees in foreclosures, sometimes as high as 75 percent of unpaid principal). It would put a floor on the falling housing market and remove clouds on mortgage-backed securities held by banks.

“Banks can afford this” — and “we have already paid for it,” with $14 trillion worth of federal bailouts and backstops for banks, some of which has been repaid but much of which never will be, the report argues.

“The banks created the housing crisis with their reckless and predatory lending practices,” NBL argues. “They should be held accountable for the damage they have done to our economy and be forced to do their part to clean up the mess they have created.”

“It takes community organizations to force the hand of the banks,” said Theresa Welch-Davis of SAC. “We need aggressive action now that creates a new bottom line for homeowners and the American economy.”