Yale Team Presents Recommendations to Stem the Foreclosure Crisis

This story was originally posted on December 17, 2010. On April 14, 2011, video was added to the story.

On November 30, a group led by several Yale SOM faculty members presented a white paper on Capitol Hill aimed at addressing the ongoing foreclosure crisis and the resulting economic distress in minority communities.

The event, attended by members of Congress, Obama administration officials, federal regulators, and business and nonprofit leaders, marked the culmination of work begun when Sharon Pratt, former Washington, D.C., mayor and president of the Opportunity Funding Corporation, contacted Constance E. Bagley, professor in the practice of law and management at Yale SOM, about pulling together a group to study the issue. Over six months, Bagley teamed with faculty and students from SOM and Yale Law School to study the causes and effects of the crisis within African-American and Hispanic communities and search for strategies to deal with it. "This was a very ambitious project with not a lot of time," said Bagley, who recruited fellow SOM faculty Heather Tookes, associate professor of finance, and Stephen Hudspeth, a lecturer in law at Yale SOM and Yale Law School, to work with her. "What strikes me about this is the incredibly wide and diverse group of thought leaders with whom we collaborated. This is a very important problem. The economic well-being of the American middle class depends on how it’s addressed."

The white paper begins with a troubling statistic: A majority of Americans now fear not being able to pay their mortgage or rent. The foreclosure crisis that contributed to the 2008 financial meltdown continues to hit communities of color particularly hard. Hudspeth, who led the working group responsible for proposing a revamped homeownership strategy, enlisted the aid of the Law School’s Ludwig Community and Economic Development Clinic, led by Robin Golden. He noted how in many minority communities, wealth was based almost entirely on housing. As foreclosures mounted, wealth generated over several generations was wiped out. "This affects every aspect of life," he said. "The loss of wealth—estimated to be more than $375 billion in communities of color alone—means the loss of future educational opportunities, the loss of the opportunity to start a business. Foreclosures destroy families and neighborhoods but can be readily addressed if there is the political will. We did it in the Great Depression and after World War II, and we can do it again."

The point of the white paper, which was written largely by John Rooney, a 2010 graduate of Yale SOM, is to spur action by the federal government to alleviate the crisis and start rebuilding the wealth of these communities. Bagley said that the reaction, especially from members of Congress, was positive and encouraging. "Congressman Elijah Cummings said this is the best white paper he has ever read," she said. "We’re all optimistic that the momentum created by the white paper and presentations on Capitol Hill will advance thinking and mobilize multiple constituencies to solve this crucial issue."

In all, about 70 people were involved in the project, with particular support from leaders at the Center for Responsible Lending, Aspen Institute, Urban Institute, National Community Reinvestment Coalition, and Joint Center for Political and Economic Studies.

The paper makes 10 key recommendations for dealing with the foreclosure crisis:

• Expand nonprofits programs that leverage increased housing affordability in hard-hit neighborhoods to replace troubled mortgages and keep eligible homeowners in place, thereby avoiding further vacancies and evictions.
  
  
• Increase the use of minority-owned firms in the maintenance and disposition of real estate owned (REO) properties, and increase sale of these properties to owner-occupants.
  
  
• Strengthen oversight of servicers participating in the Home Affordable Modification Program (HAMP) and other government foreclosure mitigation programs by creating an independent office to oversee compliance and by giving rejected homeowners access to an appeals process.
  
  
• Increase the reach of housing counselors to help distressed homeowners to avoid foreclosure when possible. Going forward, implement counseling programs to promote financial literacy for prospective homebuyers and to ensure that they will not fall victim to unscrupulous lending practices.
  
  
• Encourage servicers to avoid unnecessary foreclosures by changing accounting rules that discourage loan modification.
  
  
• Reform bankruptcy laws to allow court modification of underwater mortgages, thereby encouraging servicers to negotiate such modifications themselves.
  
  
• Regulate more vigorously the origination of mortgages to prevent predatory lending, and ensure that low- and moderate-income communities and communities of color are adequately served by financial institutions.
  
  
• Establish a National Home Accounts program to increase the ability of low- and moderate-income families to save for down payment on a home.
  
  
• Invest in minority-community-focused small business initiatives and targeted infrastructure projects to reduce elevated unemployment rates and stabilize communities most affected by this crisis.
  
  
• Modernize and more effectively enforce the Community Reinvestment Act to revise the incentives for financial institutions to comply, and award CRA credit for effective foreclosure-prevention activities.