The foundation of a home is laid next to newly constructed homes in Miami on Nov. 19
If U.S. Treasury Secretary Henry Paulson thinks he got hammered on Capitol Hill Tuesday morning for not doing enough to stem the tide of foreclosures, he's lucky he wasn't at the public library in Miami Gardens, Fla., Tuesday night. More than 200 homeowners facing foreclosure were hooking up with their lenders to hash out mortgage modifications, and they had some choice words for what they view as Washington's lack of help. "Paulson and the rest of them don't give a damn about what's happening to us," said Angela Butler, 49, a school custodian who, after going on disability two years ago when she suffered a stroke, refinanced her four-bedroom Miami Gardens house to a lower, adjustable rate — only to see her monthly payment shoot up almost $1,100 this year. "All the dominoes are falling on top of us out here," Butler added, gripping her cane, "and they're just sitting up there behind their desks takin' care of the banks."
What really irks Butler and her neighbors is that they were led to expect much more. They saw hope last summer when Congress passed the Housing and Economic Recovery Act, which seemed to promise housing relief for hundreds of thousands of homeowners like Butler via mortgage-restructuring aid. But for reasons no one in Washington has adequately explained, that part of the bill never really materialized. What foreclosure-ravaged communities got instead were slivers of a $4 billion Neighborhood Stabilization Program (NSP) fund to buy and refurbish already foreclosed homes. The city of Miami Gardens received $6.8 million, enough to acquire about 40 homes, less than 1% of the more than 4,000 units the city has in foreclosure, which amounts to the worst housing crash in hard-hit Florida. Meanwhile, foreclosures nationwide, the root of the U.S. economic crisis, keep piling up: last month saw a frightening 25% rise in mortgage collapses compared with October 2007. (See TIME's video "Facing Foreclosure in Tampa.")
But if little is likely to be done inside the Beltway — Federal Deposit Insurance Corporation chairwoman Sheila Bair is still pushing for a homeowner-relief plan — local leaders are looking for makeshift solutions at the grass roots. One notion is to let cities use NSP money to leverage lenders into helping more borrowers avoid foreclosure. Since lender banks naturally want foreclosed properties taken off their hands in the NSP buyout — and since reckless and even predatory lending was so often at play in the subprime mess — perhaps they in return ought to be required to show some level of commitment to homeowner relief, such as revising interest rates and other mortgage terms. This month, in advance of the Dec. 1 deadline cities face for submitting plans for their NSP funds, Miami Gardens councilman Andre Williams sent the Bush Administration a request to permit the city to use a "carrot-and-stick approach." "Can we," Williams asked, "steer our NSP funds to banks that promise to modify loans of homeowners threatened by foreclosure in our community and ignore banks that do nothing?"
Williams, a real estate attorney who organized this week's foreclosure-prevention clinic in his predominantly African-American city north of Miami, knows the Feds aren't likely to approve his proposal. But he wants to get the discussion started — and to keep any pressure he can on lenders. "Even if we can't compel them, we want lenders to know that we're expecting good corporate citizenship in this process," he says. "The real relief in this credit crisis has to be directed at the thousands and thousands of people whose homes we can help save. It has to be part of the conversation."
The lenders insist they need neither carrot nor stick to do what's right in this emergency, and indeed, many banks, including JPMorgan Chase, Citigroup and Wells Fargo, have already instituted loan-modification programs (if only, critics say, to head off any government-imposed solution). "We've always been committed to foreclosure outreach," says Joe Ohayon, vice president at Wells Fargo Home Mortgage, one of seven lending institutions that voluntarily took part in the Miami Gardens clinic and have won praise from Miami Gardens officials. "And we're just as committed to working with the cities, because they're viewed [by borrowers] as a trusted third party that helps us make early contact" with at-risk homeowners. Ohayon and other lenders also point out that while they're free to renegotiate the terms of mortgages they still own, the vast majority of troubled home loans have been securitized and are owned by a wide array of investors. Their permission is usually required for modification, and getting it can be a daunting task, which is why many experts have called on Washington to step in with some kind of mandated legal solution.
But Florida homeowner advocates say most lenders were hardly as amenable to mortgage relief last summer as they've become in recent months, when local governments like Miami Gardens began pressing the issue. "We're seeing a change, more willingness among the banks to cooperate," says Arden Shank, head of the Miami nonprofit Neighborhood Housing Services, which is working with Florida cities to counsel homeowners on foreclosure prevention. "Not too long ago, most banks wouldn't even talk to us." (Read "Fannie and Freddie Offer New Plan to Help Homeowners.")
Many lenders, the advocates hope, are starting to see not just the financial benefits of avoiding foreclosure — the avoidance of legal costs, boarding-up and lawn-mowing fees, sharply discounted resale values — but the p.r. dividends as well. That may be especially true for companies like the San Francisco–based Wells Fargo. Though it didn't indulge in as much subprime lending as other banks, it is being sued by the city of Baltimore for allegedly using predatory lending practices in predominantly African-American neighborhoods that have since seen inordinately high foreclosure rates. (Wells Fargo denies the accusation, and has asked a judge to dismiss the suit.) Countrywide Financial (now merged with Bank of America), which also attended the Miami Gardens clinic, last month settled lender-fraud complaints brought against it by 11 states by agreeing to lower home-loan amounts and interest rates at a cost of $8.4 billion.
Under the current NSP guidelines, cities are required to steer their buyout money into designated areas, usually zones with a high concentration of foreclosures and subprime home loans. The cities are also supposed to acquire the properties at a discount of at least 5% from current market value. But one of the risks of that stipulation, say housing experts, is that if the houses are bought up at too deep a price cut, especially with housing prices so depressed right now, it could force surrounding property values further down and instead exacerbate neighborhood destabilization. That's another reason many cities would have preferred a focus on efforts to prevent foreclosure and keep existing families in those homes. Another problem is that the NSP is tacitly obliging cities to become property managers, something "local governments just aren't set up to do," says Shank, whose organization is also a licensed lender and mortgage broker that helps cities acquire and resell foreclosed homes in situation like this. "It's not their role."
Either way, it was obvious at Tuesday night's clinic how desperately these communities need massive mortgage aid right now — and how big a challenge providing it can be. A large group of residents from a newer, more upscale Miami Gardens housing development called Coconut Cay showed up for loan relief. During the overpriced-housing boom of this decade, some of the houses went for more than $500,000 — but now a number of buyers are wrestling with more mortgage costs than their battered finances can handle. It's a reminder that rash borrowers are often as responsible for the housing debacle as reckless lenders. But to prevent the foreclosure of a sizable chunk of an entire subdivision, one solution for Coconut Cay lenders might be to lower loan principals down to the houses' current, and more reasonable, market values (especially since the houses in many cases are worth less now than the mortgages anyway). That's the kind of foreclosure-prevention relief that cities like Miami Gardens thought last summer's federal legislation was going to facilitate but didn't. Which leaves communities to depend on little more than good corporate citizenship from many of the same companies that helped create the housing mess in the first place.
Read TIME's Two-Minute Bio of Bank of America's Kenneth Lewis.