HOMELESS

How America’s foreclosure crisis helped make Donald Trump president

Obsession
2016
Obsession
2016

Foreclosures helped put Donald Trump in the White House, and his choice for Treasury secretary, Steve Mnuchin, was in a good position to understand how.

Mnuchin, a veteran financier, bought OneWest Bank after the financial crisis and ran it for six years before his consortium sold it for a $1.5 billion profit. In that time, the bank, known as IndyMac before it was seized by federal regulators in 2008, foreclosed on some 36,000 homeowners.

National Public Radio found two such homeowners, retirees who lost their home in 2011 after taking on a home-equity loan they could not afford. Like many caught in the forest of post-crisis foreclosure bureaucracy, the couple couldn’t maintain connect with anyone at the bank to restructure their loan, and saw their house sold without warning.

Dismayed with their treatment by the system, they voted for Trump in the 2016 election. A new analysis shows they are far from the only people bearing the scars of the housing market who backed the real estate developer’s run to the White House.

The left-leaning Center for American Progress compared real estate data with election results, finding that counties that voted Republican tended to have higher median rates of negative equity—homeowners paying off loans that are worth more than the market value of their house, a warning sign for potential foreclosure. Counties that had voted for the Democratic candidate in 2012 and switched parties in 2016 had even higher rates of negative equity.

Areas where mortgage markets yet to recover from the financial crisis and economic weakness are particularly found in rural areas, in states like Michigan and Wisconsin that Democratic political strategists had counted on as reliable electoral college votes. Instead, Trump would end up with surprising victories thanks to turnout in rural districts. In some places, housing insecurity may not have motivated anti-Clinton votes but instead simply made it more difficult for her voters to get to the polls.

Sarah Edelman, the director of housing policy at the Center for American Progress, cautions that the connection between underwater mortgages and Trump votes are “correlation, not causation,” but highlights “an important factor in the lives of Americans that has gotten very little attention.”

“Housing was not talked about much in the presidential campaign, by anyone,” Edelman says. “People don’t talk about housing because it’s really complicated, or it seems really complicated. [But] aside from your job, housing is the one economic issue that people understand the best, the economic issue that affects them most directly. The country would have benefitted from a more robust discussion of housing during the campaign.”

Crumbling foundations

The closer you look, however, the more it seems our inability to discuss housing policy sensibly plugs directly into our current political moment. The erasure of $11 trillion worth of home value and the loss of more than 10 million homes to foreclosure shook the US economy in ways that are still playing out.

Many people date the start of the “Tea Party,” in many ways a predecessor to Trump’s base, to a televised rant by CNBC personality Rick Santelli in February 2009. Less well remembered is what Santelli was so upset about: An Obama administration plan to convince banks to renegotiate mortgages with customers who owe more than the their house is worth, rather than foreclose on them. The idea that some individuals might get help from the federal government was seen as a appalling, even as the government moved to bail out the financial and automotive industries.

That resentment—that someone else is getting help, but not me—is one of the motivating themes of the grievance-based campaign that helped put Trump in office. It’s anger that draws on the idea that the housing crisis was primarily caused by irresponsible borrowing, and ignores the existence of irresponsible lending. And this anger helped forestall effective solutions, Edelman says, citing a “a misunderstanding among some segments of the public that the housing crisis was caused by irresponsible homebuyers, which undermined political support for bolder actions to provide struggling homeowners relief, [but] irresponsible lenders were the primary driver of the housing crisis.”

The program that had Santelli red-faced and sweaty was called the Home Affordable Modification Program (HAMP), and its defenders note that it aided hundreds of thousands of homeowners by giving banks incentives and a rubric to provide real relief to borrowers. But its critics make a compelling case that it fell short for the millions more who lost their homes. Those California retirees who were foreclosed upon by One West, for example, reportedly qualified for HAMP modifications that were never delivered.

The Obama administration would update the program several times. Larger efforts to improve it—say, by forcing banks to write down the principal on loans, and not just the interest payments—were fought for years by Republicans in Congress.

One nominee to run the Federal Housing Finance Administration (FHFA), North Carolina regulator Joseph A. Smith, was blocked from confirmation by Senate Republicans because it was suspected that he would push for more relief to homeowners in the form of principal write-downs. The FHFA would eventually begin supporting such reductions only last March, after the worst of the crisis was over. Facing half-hearted lobbying from the Obama administration, lawmakers declined to adopt a reform known as “cramdown” that would to allow bankruptcy judges to write down the value of a mortgage loan that is larger than the value of a home, as they can with many other debts.

Left behind

The economic recovery helped many Americans get past the foreclosure crisis. But the recovery was not well-shared, as Edelman and her team documented last year. Their observations of counties with high numbers of underwater homeowners became the basis of their new electoral analysis.

“While most of our housing market has recovered, there are pockets of the country have not,” Edelman says. “One of the mistakes we make regularly in DC is pretending that the foreclosure crisis or the housing crisis is over everywhere, and it’s clearly not.”

The problems with negative housing equity are manifold: They are the loans most likely to end in foreclosure, for one. They also prevent people from drawing on their homes as an asset for loans to start businesses or pay for education. Homeowners who try to avoid bankruptcy by sticking with a negative equity mortgage can become trapped by the home and unable to relocate in search of higher-paying work. And, ultimately, they represent a drain on cash that consumers could spend on other goods rather than paying tens of thousands of dollars for, in effect, nothing.

A key contributor to sagging home values in troubled markets are unmaintained vacant homes, abandoned due to foreclosure, and the lack of financing for community land banks to keep them in shape. The economic malaise in places where trade has undercut manufacturing jobs, or where sizable portions of the population has left in search of opportunity, feeds into housing market problems: They make banks reluctant to to support new home purchases that would buoy overall prices.

“Part of that is because home values are low, and so the lender is going to make a whole lot more money if they can make loans in areas where the loan balances are higher and the compensation is greater, than they will on a $60,000 mortgage loan,” Edelman says. “We don’t know enough about why that’s happening. Some banks are better than others, and really innovating on how they reach consumers, and how they think about compensating their loan officers as well.”

Despite complaints from the financial lobby, the regulations put in place after the crisis to prevent so-called toxic mortgages—predatory loans with little downpayment, no income verification, or escalating refinance clauses—don’t appear to be hurting lending, nor are new rules that force banks to hold more capital. Yet the Trump administration and new Congress are likely to undo these laws, in part to restrict the Consumer Financial Protection Bureau, an agency created after the crisis hit, and designed to make sure consumers understand what they’re getting into when they make a major financial decision like borrowing money to buy a home.

What’s next for housing?

Housing advocates, who already fear major cuts to affordable housing investments under the Trump administration, are also dismayed by the news that Ben Carson, a Christian motivational speaker and retired neurosurgeon with no prior experience in housing finance, will be nominated to lead the US Department of Housing and Urban Development (HUD).

Meanwhile, future Treasury secretary Mnuchin has already mentioned plans to privatize Fannie Mae and Freddie Mac, the government-owned mortgage finance corporations that still backstop the bulk of the US mortgage market.

But figuring out how to responsibly extricate Fannie and Freddie from the market is a Gordian knot of a policy problem that has languished in Washington, with few in either major party eager to discuss the winners and losers of such a move. Most of the discussions have revolved around long-shot efforts by Wall Street investors to seize the formerly insolvent companies’ post-crash profits, rather than letting the government recoup its investment—a strategy that appears to have received a boost given Trump’s election.

Mnuchin’s limited remarks on the topic to date suggest he is eager to wind down the two companies or eliminate them entirely, but housing finance experts across the political spectrum believe it will be difficult, if not impossible, to do without severely disrupting the market for home loans. Even the American Enterprise Institute’s free-market plan to eliminate Fannie and Freddie depends on enacting a new, $4.5 billion annual tax subsidy to homebuyers—funded, naturally, by cutting spending on affordable housing at HUD and, less believably, by cuts in the home mortgage interest deduction.

All this suggests we shouldn’t expect the Trump administration to offer relief to the more than 7 million American families still under water on their mortgages, even if their votes helped put Trump in office. Instead, the message about that key asset for the American middle class will likely be muddled again by the use of populist rhetoric to advance the financial sector’s goals.

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