California began a 90-day moratorium on foreclosures this month. Gov. Schwarzenegger signed The California Foreclosure Prevention Act last February. This bill is important because California, home of Countrywide (acquired by Bank of America), is a leader in foreclosures. If you combine the number of foreclosures in California with those in Nevada, Arizona, and Florida, together they represent about 50% of all the foreclosures in the entire country. I’m glad to see that the state took action.
The problem is that the law isn’t set up to enact real change – the changes necessary to address the problem at hand – of how to keep people in their homes. Under the Act, lenders and servicers that can prove they already have a loan modification program in place are exempt from the law. Note that they don’t have actually to modify any loans, just have a “program.” In addition, the bill does not require a servicer to violate contracts for investor-owned loans, but as we know from the collapse of the market, most of the loans that require a moratorium on foreclosures are the same loans that were sold and are now worthless. Senator Corbett, who introduced the bill, said in a recent interview, “I would have liked to have written a much stronger bill.”
Even if the modifications did take place, and there was a moratorium for California homeowners seeking help, the law would only delay the inevitable for 3 months.
Unfortunately the State is a little distracted right now. I was recently up in Sacramento meeting with various state senators and assemblymen, and in speaking with those at the front line, it was apparent that the problems facing the state were greater than could be derived from just the media reports. There are roadblocks at every turn. And I deeply respect the marathon hours our legislators are putting in to solve a host of issues that cut to the very core of our financial and social infrastructure. California is facing a $21.3 billion gap between spending and revenue while at the same time losing jobs at an alarming rate. Sacramento has been unable to find a solution. “People don’t realize where California is at — people are losing homes, people are losing jobs,” Maldonado told CNN affiliate KOVR. “We are in a fiscal emergency and we need to come together to (resolve) it.”
I think there is something California and other states can do to seriously help stem the tide of foreclosures — think locally. To think locally, we can take some lesson from the way California is leading solar energy production and adoption, facilitated by institutions and private individuals. There are three things they did in the case of solar:
1. First California articulated and adopted a common goal for Solar power. In 2006 the California Public Utilities Commission announced a goal of 3,000 megawatts of solar generation capacity by 2016. Legislatures began to sing a single song. A commission was organized.
In this housing crisis, California needs to do the same thing — state a goal, and act to build a program to address the problem. Certainly the tax revenue in property, not to mention sales from home repair, furnishings, and utilities, from citizens in their own homes makes this a viable program to fund and more immediate that even solar power (not that solar power is not important for the earth’s future, but per Maslow’s hierarchy of needs, first things first). In April of 2009, according to RealtyTrac, there were 96,560 foreclosure filings. Assume an average home price of 350K, at a 1% property tax, that’s $337 million of revenue at risk in a single month of foreclosures. In 2008, there were 523,624 properties foreclosed in California or using the same math, $1.86 billion of property tax revenue. That’s money lost indefinitely as a foreclosure can prevent a person, or a couple – people often in their 30’s, in their prime earning years – from owning a home again for the next decade. That’s a lose-lose situation for all. So it’s time to get the lenders involved – it not only protects our social fabric, but the lender’s own revenue potential.
2. Second, they created rules. The legislature created a very transparent regulatory process and involved the public and business community to participate, (Rule-making [R.] 08-03-008). Likewise, California needs to create standards for loan modifications and refinancing, working with investors and business but also with consumers – it makes sense to involve those who are most affected. Standardizing for example, the loan modification process or FHA refinance process allows for a common framework in which to educate the public. Without such regulations and rules the interaction between business and consumer is unique every time. I’m not a big fan of regulations, but sometimes it’s what is necessary to get a lot of people with disparate roles working together.
3. Third, in the case of solar, the legislature partnered with consumers and business instead of pitting them against each other. California invested in developing partnerships with new start-up technology companies looking to find new ways to make solar power more efficient and accessible. The players also worked with large utilities, the stalwarts of the industry to build scale. They educated the consumer and built incentives and credits to motivate conversion.
In the case of the housing crisis, instead of legislating an Act that essentially brushes the problem under the carpet for 90 days, California should act. — build incentives for home owners to work with lenders rather than avoiding or trying to punish them, and incentivize lenders and investors to work with the local legislature and consumer groups to meet the goal. Build trust, iterate on results, and team with all who are willing and can help – essentially treat the housing issue as a grassroots campaign.
Homes build neighborhoods. States like California can have a significant impact in this crisis. Solar power is a great initiative and deserves our legislators’ real attention though programs and leadership. But protecting the basic fabric of our neighborhoods could use the same coordinated attention.
