Building policy through collaborative deliberation: a reflection on using lessons from practice to inform responses to the mortgage foreclosure crisis.

• Author: Golden, Robin S.

Introduction I. The Fall and Rise of "Local" in the Foreclosure Crisis II. Experience and Evidence from New Haven III. The Role of Counseling IV. The Opportunity Funding Corporation's Economic Stabilization White Paper Series: A Model for Informing Federal Policy? V. Supporting and Expanding the Counseling Process Conclusion INTRODUCTION

In the early days of awareness regarding the current foreclosure crisis, industry experts and observers suggested that the foreclosure problem was limited to a few areas like the Midwest, California, Florida, and Arizona. (1) These experts and observers questioned the data (2) and predicted that the economy would improve by the end of 2007. (3) Even then, some in the federal government like Sheila Bair, Chairperson of the Federal Deposit Insurance Corporation (FDIC), recognized the need for quick action to reduce the number of foreclosures. (4) Unfortunately, federal responses were and continue to be insufficient. As Julia Gordon at the Center for Responsible Lending explained in her congressional testimony in October 2010: "Things did not need to be this bad. If the Bush Administration had moved quickly back in 2007, or if the Obama Administration and Congress had acted more forcefully in early 2009, we could have significantly limited the breadth and depth of the foreclosure crisis." (5)

Instead of abating, the foreclosure crisis has turned into an economic crisis. Today, job loss now pushes many homeowners with prime mortgages into foreclosure, (6) while continuing market decline leaves others owing more on their mortgages than their homes are worth. Current estimates have twenty-five percent of houses "underwater," and some analysts predict as much as forty-eight percent of all residential properties nationwide will have a negative equity between their mortgage balances and their property values before the housing market recovers. (7)

A major challenge has been the unwillingness of servicers to modify at-risk and delinquent mortgages early, appropriately, and on a large enough scale to contain the crisis. The federal government has been unsuccessful to date in motivating servicers to make the kinds of changes to mortgages that would make them affordable in the long-term to homeowners. (8) As Gordon noted, "the government put forth a series of initiatives that relied on voluntary actions from servicers in return for targeted monetary incentives. In evaluating how well this approach has worked, the facts speak for themselves." (9)

These challenges and other policy failures should have been aggressively addressed early in the crisis. They were not. Is the federal government too far removed from a feedback loop on its own policies? Or, is the information getting in but no one is acting on it? The challenge of gathering and interpreting accurate feedback from local sources at the national level may seem insurmountable. Without such a feedback loop, however, federal programs cannot adjust and will ultimately be minimally effective, particularly in areas like housing markets that are so locally determined. I have been both an actor on the local level, trying to address the crisis, and an observer of the failure of federal policies to effectively respond to the crisis. (10) In the last two quarters of 2010, I also had the privilege of working on a collaborative process using lessons learned at the local level to assess existing policies and develop recommendations for new policies to address this continuing crisis. This essay is a reflection on the power of this collaborative process and the potential to use such processes to engage and inform federal actors. (11)

This essay starts by examining the role of "local"--or, more accurately, the absence of such a role--in the lead up to the crisis. It then looks at the return of the local focus in the responses to the crisis and how these responses served as testing grounds for federal policy initiatives. The essay looks closely at one local response in particular--the Real Options, Overcoming Foreclosure (ROOF) project in New Haven, Connecticut. (12) Then, focusing on just one example, the role of the U.S. Department of Housing and Urban Development (HUD) certified counselors, the essay describes how local efforts quickly revealed the challenges that have stymied the efficacy of federal responses to the crisis. (13)

The essay then describes a recent example of a policy development exercise that built on and integrated lessons learned through local work. The Opportunity Funding Corporation (OFC) and its strategic partner, the Yale School of Management, led the project. It brought together more than seventy experts on various aspects of the foreclosure crisis from think tanks, advocacy groups, government, and the housing industry. (14) For six months, the group distilled the lessons from local level work to design new and vet current proposals for stemming the crisis and rebuilding wealth in the hardest hit neighborhoods. Knowing the needs of those on the ground and then considering those needs through multiple lenses resulted in recommendations that are informed, timely, and appropriate for implementation. Again using the example of the role of counseling, the essay explores how this deliberative process used local experience to develop a robust set of policy recommendations for this area. The group's full set of recommendations was delivered to members of Congress and the Obama Administration on November 30, 2011. (15)

1. THE FALL AND RISE OF "LOCAL" IN THE FORECLOSURE CRISIS

   The separation of local financial institutions from direct engagement with homebuyers has been a remarkable result of the changes to the home buying process that led to the mortgage foreclosure crisis.

   The home mortgage market in its traditional form, and when it worked well, was one in which personal relationships between parties involved in the transaction could trust one another and were constrained by laws created to combat discriminatory denials of credit.... [T]his market experienced a radical transformation, and these personal relationships gave way to more impersonal transactions. (16) Think about the famous scene in It's a Wonderful Life when only the movie's hero George Bailey and the evil Mr. Potter stay calm when there is a run on the banks. (17) George saves the Bailey Savings and Loan by explaining to the crowd of anxious depositors why he cannot give them all their money back right now.

   [Y]our money's in Joe's house, that's right next to yours, and then the Kennedy House and Mrs. Macklin's house and a hundred others. Why, you're lending them the money to build and then they're going to pay it back to you as best they can. Now what are you going to do, foreclose on them? (18) George was describing a process that barely exists anymore (except perhaps among community development financial institutions) where the local banker "knows" all, or at least most, of his (they were usually male) account holders. The banks made the loans, serviced the loans, and worked directly with struggling homeowners to help them save their homes. The point of this diversion is not to make the case that all mortgage-backed securities are evil, but rather to point out how far a formerly local based process has moved away from its sense of place.

   One continuously evident facet of the national foreclosure crisis is that it has been an agglomeration of many local foreclosure and housing market crises. Those familiar with the crises in their own regions, states, cities, and neighborhoods tend to have the best grasp of the nature of the problems occurring in their local housing and mortgage markets. State housing finance agencies, which have been in the business of assisting modest-income homebuyers in their respective states with access to sound, responsible mortgage credit, are among those with their fingers on the pulse of the local markets in their state. Some of the obstacles in designing a nationally standardized foreclosure mitigation effort--such as those of the Bush Administration's industry-led Hope Now effort or the Obama Administration's Home Affordability Modification Program (HAMP) initiative--derive from the fact that they are not easily adapted to the particular needs of local communities and housing markets. (19) When the foreclosure crisis hit, servicers inundated with requests for modifications were understaffed and unprepared. (20) But another problem with the current system is the physical separation between those "making decisions" and the homeowners, neighborhoods, and houses about which the decisions are being made. Although much can be determined about a housing market by photographs, comparable sales, and other data collection; there is nothing that replaces local knowledge. Anyone who has worked with the large servicers understands that the person negotiating about the future of a particular house, on a particular street, in a particular neighborhood is likely to be hundreds, if not thousands, of miles away. (21)

   One example of the impact that this disconnect has had on hard hit neighborhoods is the treatment of renters in properties upon which the owner has been foreclosed. The "standard" policy of servicers has been to evict tenants (even those who have been paying their rent on a timely basis) once the building has gone through foreclosure. As described in an article prepared for the servicer industry, "[s]ervicers should recognize that ... measures extending the eviction process will result in lower third party bids at a foreclosure sale when the property is tenant-occupied because the purchaser may either have to pay more in a 'cash for keys' arrangement or see further diminution in value." (22)

   These policies, set on a national basis by large servicers, were not voluntarily adjusted despite the obvious changes in local conditions. Where foreclosed houses would remain unsold for months (like many of the hardest hit areas in this...