Three Treasurers in Cleveland: Mortgage Foreclosure Crisis Trifecta

On Thursday morning I went to the Mt. Pleasant Neighborhood Family Service Center in Cleveland for a press availability with (from right to left in the photograph) United States Treasurer Ann Escobedo Cabral, Ohio Treasurer Richard Cordray, Cuyahoga County Treasurer Jim Rokakis, and Cleveland City Councilman Zach Reed, who had conducted a tour of parts of the foreclosure-ravaged Mt. Pleasant neighborhood just before the press event started. This highly unusual meeting of treasurers from three levels of government is a signal not only of the seriousness of the mortgage foreclosure crisis but of the gradual recognition of that seriousness by the Bush administration.

Probably the highlights of the officials' statements were the U.S. Treasurer acknowledging that something like half of the 2.2 million homeowners who face adjustable rate mortgage interest resets during the next two years won't have the financial ability to meet their new payment obligations, and County Treasurer Rokakis citing a Congressional Budget Office study that concluded that every foreclosure costs the affected community $224,000, while loan workouts on average cost only $3,300. Although Ohio Treasurer Cordray included "funding" in his description of the role that the federal government needs to play in response to the crisis, the U.S. Treasurer carefully avoided mentioning any kind of financial assistance in her remarks, focusing instead on amending lending laws, encouraging lenders to restructure loans, and educating consumers about credit products.

To start, I'm posting an audio file with the initial statements by the three treasurers, about ten minutes in length altogether, followed by a summary of the substantive parts of the remarks. I plan to update this with audio and a summary of parts of the longer question-and-answer period that followed.

"We're pleased have interest from the administration in this problem," Ohio Treasurer Cordray said. "We feel that there is much to be done; and that the administration will find as we have found in Ohio that as you dig into this problem we will all find ourselves pushed to have to do more in order to respond appropriately to the people who are suffering with the mortgage foreclosure crisis."

On the tour, Cordray said, "we saw the good, the bad, and the ugly." Some streets are holding up well with very few foreclosures, other streets "had massive numbers of foreclosures and everybody else who lives on that street are affected by the fallout of the problem. The demolition costs, the property value declines in the community, are serious issues and this is the ripple effect of foreclosure."

Cordray also said that he is pleased to be able to show how concerned Ohio government officials are and how great the need is, and "how important it is for the federal administration to take an increasing role in this, with funding, with concern, and with aggressive steps to push our loan servicers to do more to renegotiate and modify these loans."

County Treasurer Rokakis spoke next, commenting that "what people viewed initially as a Cleveland maybe probem, or an Ohio, Michigan, and Indiana problem, is clearly a national problem." Statistics show that Cleveland has gone from first in the nation in foreclosures to tenth, with the distinction of being number one going to Comstock, California, "where one out of every 26 households is in foreclosure." Detroit is still second, but four California cities are in the three through seven spots, and there are cities on that list from Florida and Colorado as well. "So, it is a problem that we have been living with for years, [and] it is a problem that now everyone in the country is experiencing."

Rokakis expressed appreciation for the U.S. Treasurer's visit and noted that they would be asking for additional measures to combat the forclosure crisis at a city council meeting that afternoon. "We need money for demolition," Rokakis said, and "we have to find a way to convince the servicers of large companies like Countrywide, and Wells Fargo, and Deutsche Bank, and others, that if they don't work these loans out, they are going to wind up taking possession of hundreds of thousands of properties nationally."

Rokakis said that a new Congressional Budget Office study shows that "every foreclosure costs that community $224,000, when you calculate all the lost property values, every workout costs about $3,300. So I'm the treasurer, and I can count, and I think $3,300 is less than $224,000. So now we have to convince the folks in the industry that that calculation works out well for them, too."

U.S. Treasurer Cabral said, "Clearly the president of the United States and Secretary [Treasury Secretary Henry] Paulson are very interested in finding ways that we can support one another to try to address this issue." She referred to "conversations that we've been able to have inside of our building with the lenders or the servicers or the counselors" in order to "bring them together so that they can, one, start to have a conversation that was incredibly important in terms of finding ways to address this on a larger scale, [and two,] identify[] some of the best practices that exist in servicers and lenders relative to mitigating lots of them and dealing with [mortgage loans] that face potential foreclosure in the near future, helping families frankly to stay in their homes." She said that the administration's interest is in "making sure that we protect families that are living in these homes stay as homeowners."

"At the end of the day," Cabral continued, "everybody loses in this process. The lenders and servicers are not interested in taking possession of these homes. For them, that is a total loss. For these communities in which these homes exist, there is tremendous loss, not only for the families, but in terms of drops in property value as well as just outlook for the future for these continuing homeowners."

Cabral said that "the goal here is to work together." She said that "we know the size of the problem, at least we believe we have a sense of it," with "2.2 million families over the next two years face resets that may lead to foreclosure." She was careful to point out that "there are many families that are able to afford the reset," but conceded that "a significant share, somewhere in the neighborhood of fifty percent, [are] facing larger challenges than they are able to accommodate." The goal here is "to find ways that we can work with lenders to work out agreements to provide for continued home ownership for those family members."

Cabral said that she is pleased about the creation of Hope Now, an industry alliance formed with government encouragement to engage in outreach efforts to homeowners in distress. She described it as "an initiative where the lenders, the providers, everybody, the counselors, are at one table saying, 'Let's work together to try to figure out how to get this done.'"

"There's a great deal that we can learn from what's going on here in Ohio," Cabral continued. "I've been very impressed with what I've seen in terms of the Ohioan response to the problem. So some of my purpose here is to actually take some of your best practices back to Washington, because I think there are communities that would benefit from what you have done."

Cabral applauded Cordray for his efforts in the area of financial education in public schools, because "we as a nation need to do better to make sure that each of our citizens [is] well informed about financial products. A lot of folks would not have found themselves in the situation they did if they had understood what they were signing up for, what they were buying into." There's a "larger set of goals" that will "lead to perhaps a more productive society if we can work together."

After expressing appreciation for the tour and thanking the local officials for their leadership, Cabral said that "this is something - a size of a problem that we understand, and if we work together quickly, we can address and make sure that there aren't continued ripple effects and fallout in future years." She referred to "changes that need to be made to our lending laws [and] to our practices relative to mitigation and foreclosure," and "more work needs to be done in the area of financial education. If we do this together, then I do think we can come out of this a stronger nation."

Cabral concluded by saying that "we need to find a way to convey to people that home ownership is still very much the American dream," and suggested that "in some instances, this is also an opportunity, for families to look at some of the homes we visited today that are boarded up and say, 'This is an opportunity for me to become a homeowner.'" She said "we do not want to slip in terms of the improvement, the growth that we've made in home ownership over the past few years, and this threatens that." Therefore, "we must work together to make sure that that American dream continues to be available to people throughout the country regardless of their background," so long as "they're well educated and they get the right products, they can become homeowners, and purchase a home that fits within their budget."