A Tale of Two Recoveries: How Will Changes to DASP Effect Homebuyers?

Elyse Cherry is Chief Executive Officer of Boston Community Capital. Cherry helped found Boston Community Capital in 1984 as a member of its original Board of Directors and has been integrally involved in its development and growth of the company. Cherry has authored opinion pieces for The New York Times, The Los Angeles Times and The Huffington Post, among others. Cherry has served on the boards of directors of more than a dozen privately held companies including Pilgrim Insurance Company, Zipcar, and Acelero Learning and is a frequent panelist and speaker at national conferences.

Cherry spoke to DS News about the recent proposed changes to HUD’s Distressed Asset Stabilization Program and the effects she thinks they will have on homebuyers.

DS News: How do you believe that these changes made by HUD to the Distressed Asset Stabilization Program help keep homeowners in their homes?

Cherry: Well, I think that they are an important set of changes, and from our perspective, long overdue. The fact is that the Congressional Budget Office somewhere around 2013 came out with a report that said it was more cost effective for Fannie and Freddie to actual renegotiate with the homeowner and keep the homeowner in their home rather than going through the foreclosure and eviction process. It’s not just beneficial for the lender and homeowner, but it really goes a distance towards stabilizing neighborhoods if we can actually keep people in their homes. To the extent that the new home relations really require principle reduction as a first step in the negotiation with the homeowner, I think it really creates an opportunity to get homeowners back to right-sized mortgages consistent with what the market is and what they can afford in a way that is no less detrimental to the lender and perhaps even beneficial to the lender and has the added benefit of stabilizing neighborhoods. I think the change will not only impact HUD and the loans that it sells out at auction, but my hope is that it will actually change the conversation around how best to modify these loans.

DS News: Have you had any success with implementing principal reduction programs in your work?

Cherry: Yes, we've been able to stabilize more than 650 families and done somewhere of over a $100 million in mortgages. I think we’ve had principal reductions of $50 million give or take as well. What we have discovered is once we get people back into a mortgage that is consistent with what they can afford and consistent with market, they all go right back to paying. We have a default rate that looks like the national average for residential mortgages despite the fact that most of the folks we deal with are low-income and have been in default or foreclosure.

DS News: In regard to the criticisms of the changes to DASP, how do you respond to those who are concerned with issues such as taxpayer risk?

Cherry: First of all, whatever losses have been incurred have already been incurred. They may be realized or unrealized, but they have been incurred. A home that was worth $400,000 at the height of the bubble isn't worth that anymore in many neighborhoods, particularly in low-income areas. For example, if you are holding a home on the books that's $400,000 and it's now worth $250,000, no one is going to pay you $400,000 for that home. The idea that the value will come back simply by waiting long enough because it well come back as a result of the appreciation has really been established in the last five years not to be the case. One of the challenges with people in low-income communities is they have had flat wages for a very long time. If your wages aren't going up, it's hard to afford a bigger mortgage, and if you can't afford a bigger mortgage it’s really hard to afford a higher price for a house.
As a result, what we've seen really is what I sometimes call "A tale of two recoveries.” That is, in middle and under-middle income communities, housing practices have returned to their former levels before the Great Recession, but in low-income communities, they haven't returned. This notion that somehow dealing with homeowners and offering principal reductions is going to make somehow make that worse just has no legs. As I mentioned before, there was a study done by the congressional budget office, a nonpartisan and highly respected group, in 2013 that established that Fannie and Freddie would be better off negotiating with homeowners to reduce mortgage size than evicting people and foreclosing. I don't really understand the argument that says taxpayers are paying more because whatever the loss is, is whatever the loss is. It doesn't get bigger because we work with homeowners. The idea that because we negotiate with some homeowners, the other homeowners will just stop paying their mortgages also has no legs because there is virtually no evidence of that. In fact, the evidence has shown that homeowners continue to pay their mortgage even when from a true financial perspective, it might not make so much sense. Now, I'm not saying that there's nobody in the history of the world that has never gone through a strategic default, but as a general matter, helping one homeowner has never been shown to cause a mass movement among homeowners to stop paying their mortgages.

DS News: In April when the FHFA announced their principal reduction program, they initially estimated 30,000 homeowners might be able to qualify, but now the number is appearing to be significantly less. What is your reaction to this?

Cherry: We have been pushing at the FHFA for a couple years along with everybody else to take a stand on principal reduction and I have to say both the size of the stand, the delay, and the small number of homes that are actually impacted was something of a disappointment to us. We work with the FHFA and we are pleased to do that and pleased to assist with whatever homeowners we can who have their loans with Fannie or Freddie but I certainly hope that the FHFA will see its way to taking a more aggressive stance.