Harvard-related post dives into the heart of the beast

March 3rd, 2009 by Mike Hinshaw

In the waning hours of Square Root Day, it seems appropriate to turn to an academic view of the foreclosure-and-bankruptcy debacle. Although the former is humorous, the latter is tragic–not only in devastating social effects but also in its capacity to thwart common sense.

In Vol. 3 of the Harvard Law and Policy Review Online (Jan. 19),  Adam J. Levitin jumps right in, first rattle out of the box: “The United States is in the midst of the most serious home foreclosure crisis since the Great Depression, when Franklin Delano Roosevelt spoke of ‘one-third of a nation ill-housed, ill-clad, ill-nourished.’ ”

Levitin provides some familiar statistics (millions foreclosed in ’07, more in ’08, projecting as many as 8.1 million homes by 2012) then sums up his point thus: “Millions of Americans have become trapped in unaffordable mortgages due to interest rate resets and declining home values that make refinancing impossible.”

What makes the Levitin article worthwhile is his willingness to question the differences between old-timey home loans and the modern version of “securitized” home loans. He even points out that securitization, in and of itself, is nothing new. The devil-in-the-details lurks in the changeover from regulated oversight of the process versus the privately funded, largely unregulated version.

Here’s a bit of scene-setting, as Livitin envisions the whiplash from mass foreclosures: “Foreclosures create enormous deadweight economic loss. Lenders lose a large percentage of their loan value, families lose their homes, and negative externalities abound. Neighbors see their home values fall; local tax bases are eroded, requiring either higher taxes or reduced services; foreclosed properties become eyesores and loci of crime and fire; and communities’ social bonds are ripped apart as families have to relocate.”

Anybody who’s driven around affected neighborhoods knows that tune by heart.

But this part is particularly galling: Yes, we know that Bush’s “program” for voluntary mitigation traces back for a couple of years. Yes, we know Obama’s “program” has yet to gain traction. But just take a look at these numbers: “Voluntary private market solutions to stem foreclosures have failed to keep pace with new foreclosures, and official government programs, based on private market cooperation, have been abject failures. The FHASecure program, created to allow homeowners with non-FHA adjustable rate mortgages to refinance into FHA fixed-rate mortgages, has only helped a few thousand delinquent homeowners, not the 240,000 predicted. Likewise, the HOPE for Homeowners program, established by Congress in July 2008 to permit FHA insurance of refinanced distressed mortgages, and predicted to help 400,000 homeowners, had as of mid-December 2008 attracted only 312 applications, and not actually refinanced any mortgages, in part because of its reliance on private market cooperation.”

[Note: these edited quotes do NOT include footnotes from the original]