The only way to fix the housing crisis

Government-backed mortgage-finance giants Fannie Mae and Freddie Mac may soon start offering thousands of homeowners the ability to reduce the outstanding balance on their mortgages through a process called principal reduction.

It would be welcome news if the Federal Housing Finance Agency (FHFA), which governs Fannie and Freddie, takes this path — cutting the amount a family owes on its mortgage so it no longer reflects an inflated, pre-crash value. But doing so on the very small scale that's being proposed won't be enough. If we want to finally recover from the 2008 housing crash — freeing up debt-laden families, helping them stay in their homes and stimulating the economy — the FHFA should enact this initiative as a first step and then expand it.

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We know from the government's own research that large-scale principal reduction works. Three years ago, the nonpartisan Congressional Budget Office (CBO) — the research arm of Congress — found that, had Fannie and Freddie embraced principal reduction after the 2008 crash, they would have foreclosed upon fewer families, saved taxpayer dollars and boosted economic growth.

As the industry leader, the FHFA would be making a big statement by heeding these findings and embracing broad-scale principal reduction; the rest of the federal government should follow suit and authorize a push for it across the mortgage industry. Each of America's 6.4 million seriously underwater homeowners — whose mortgage debt dwarfs the value of their homes — should have access. As the CBO showed, it's the best way forward for struggling homeowners and the wider economy — as well as for taxpayers and the lenders themselves.

Unfortunately, Fannie and Freddie — and the entire financial sector — have so far taken a different direction. With small-scale fixes, their portfolios have suffered as debt-laden families struggled to keep up with payments. The changes Fannie and Freddie are reportedly considering are a good first step, but aren't nearly enough: The proposed program's restrictions mean it would help less than one percent, or 50,000, of underwater homeowners.

It's time for the mortgage giants — which have been effectively owned by taxpayers since 2008 — to make meaningful use of the best tool we have to keep families in their homes.

The CBO study found that, with expanded access to principal reduction, foreclosures would have dropped by as much as 15 percent, allowing tens of thousands more families to stay in their homes and keeping communities intact. It also would have helped the lenders themselves, as fewer defaults and delinquencies more than compensate for temporary losses from principal reduction. Taxpayers, who bailed out Fannie and Freddie after the crash, could have won big, too. The federal government could have saved taxpayers up to $2.8 billion, the CBO found, while stimulating the economy. Expanding eligibility to more homeowners would have even larger effects, it concluded.

Fannie and Freddie, and the financial sector generally, have so far failed to follow these findings. Yet principal reduction remains the only path forward from this crisis — for homeowners, the economy, and, in the long run, for banks and other lenders in the financial system. If Fannie and Freddie — which own or guarantee more than half of U.S. residential mortgages — lead on embracing it, other lenders should follow.

In the meantime, let's be clear: The foreclosure crisis is not over. If we now know what would work and hasten a full recovery, we also know what hasn't. As part of the spending package it passed in December, Congress decided with little notice to quietly kill off the Home Affordable Mortgage Program (HAMP). As the only option for many struggling homeowners, it proved ineffective overall. HAMP lowered monthly payments for families, but not by much, and more importantly, it kept intact outsized, pre-crash mortgages that left families buried in debt. Fewer than one million families received assistance from HAMP, and nearly one in three that did use it ended up defaulting again when the loan modifications they received did not go far enough.

While HAMP lagged on principal reduction, nonprofits like mine have picked up some of the slack with privately financed principal reduction programs — and have found them successful. But there remain thousands of families that could be helped by a more thoughtfully designed federal program.

That's why the possibility that Freddie and Fannie could get on board with principal reduction is good news. But with so few underwater homeowners eligible for mortgage cuts, the new program is far too small to solve this huge, ongoing problem across communities and our economy.

FHFA's proposal to limit the initiative based on mortgage size, among other restrictions, needs to be rethought: It is precisely the bubble-driven, overinflated mortgages that are driving this problem and burying families in debt. If limits are needed, we should instead look at the more relevant figure: the current market value of the home. Doing so would allow us to target everyday homeowners who remain trapped by the fallout of a financial crisis they didn't create.

We must learn from the mistakes of the past and chart a bold new course. All underwater homeowners, regardless of mortgage size, should be able to access principal reduction, to bring their mortgages in line with the fair market value of their homes. Such a proven, commonsense solution would keep families in their homes, save taxpayers money and create real change in our economy—especially in low-income neighborhoods.

The CBO had it right: For millions of underwater homeowners to re-emerge above sea level, we need a fix that matches the breadth and depth of the critical situation we're in.

Commentary by Elyse Cherry, CEO of Boston Community Capital, a nonprofit community-development financial institution. She also serves on the Massachusetts Governor's Foreclosure Impact Task Force and has served on several boards, including Zipcar. She has also won several awards including the White House's "Champions of Change" and Boston Business Journal's "Power 50: Top 50 Most Influential Bostonians" awards in 2014 and Spirit Magazine's "Top 25 LGBT Power Players" in 2015.

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