The American Way of Poverty: How the Other Half Still Lives (41 page)

The trend holds up around the country. Nationally, according to a May 2011 report by the Brookings Institution, as of 2004 “there were almost 190,000 inmates of state and federal prisons in the U.S. who had a history of foster care during their childhood or adolescence. These foster care alumni represented nearly 15 percent of the inmates of state prisons and almost 8 percent of the inmates of federal prisons. The cost of incarcerating former foster youth was approximately $5.1 billion per year.”
²⁵
This is a large amount of money, much of which could be saved were states to more effectively blend aid to ex-foster kids into their overall anti-poverty strategies.

In bygone years, such carefully tailored programs might have gone a long way toward mitigating homeless numbers. After all, traditionally, large numbers of the country’s homeless, the residents of skid rows from New York’s Bowery to Los Angeles’s Central City East, have come from a handful of demographic groups: foster care kids, drug addicts and alcoholics, the mentally ill, military veterans, ex-prisoners. Set up appropriate assistance programs and treatment clinics, build transitional housing, send caseworkers out into shelters and onto the
streets, and one had a fair shot at significantly diminishing America’s homeless numbers.

Not anymore. These days, with millions of families having been left homeless or at imminent risk of ending up on the streets by the housing market bust, a far more general anti-homelessness strategy is needed. Of course, treatment for addicts or the mentally ill, and housing for vulnerable groups has to remain a core part of any war on poverty, but these alone won’t be enough. Federal and state authorities must step in more assertively to salvage the savings and homes of those millions of families whose financial security was put at such risk by the foreclosure crisis.

In part, the national settlement the Obama administration and state attorneys general negotiated with the five largest banks in 2011 was on the right track, forcing large banks to place $26 billion into funds that states would then channel into mortgage relief programs. In part, however, it was a desperately incomplete project; for it didn’t include many slightly smaller lenders, it left many families still paying subprime interest rates, and its provisions were only intended to last a few years, leaving millions of families still vulnerable at the back end of the process.

At a state level, some attorneys-general, most notably California’s Kamala Harris, picked up where the national settlement left off, pushing homeowners’ bills of rights that restricted how and when banks could foreclose on owners; that made it easier for owners to go through loan modification processes; and that held open the prospect of states and individuals suing banks for more financial damages down the line.

All of this is important; but, taken piecemeal, no state or federal legislation can undo the damage caused by years of predatory loans being handed out like candy, followed by years of declining property values, and waves of robo-signed foreclosures collapsing entire neighborhoods.

And that’s why the response has to get more creative.

What happened in Boston is a good starting point. Shortly after the financial collapse, a number of Harvard Law School students signed on to work for a foreclosure legal clinic run by a law professor named David Grossman. The students and their professor would contact foreclosure victims, give them legal advice, sometimes represent them in court, during hearings that would determine whether or not they could remain in their homes. They also put them in touch with anti-foreclosure activist groups, and, perhaps most importantly, with a credit union named Boston Community Capital.

The students worked off of foreclosure lists, knocking on doors to try to connect with owners. At each house on their list, the volunteers, traveling in teams of three, would stop their car, get out, knock on doors, scout to see if the property looked abandoned (broken or boarded up windows, weeks of uncollected mail, trash strewn in the yard, and so on); if it did, they moved on. But if it still looked inhabited—or if there was even a glimmer of a chance that it hadn’t yet been abandoned—they would leave a red plastic bag hanging on the doorknob. Inside was information about the foreclosure process; about the Harvard Law School legal aid clinic, which had been working in conjunction with several other regional law schools to offer legal services in Housing Court and beyond to owners and tenants in homes being foreclosed by banks; and about the consortium of lawyers, community groups, and the Boston Community Capital (BCC) credit union collectively known as Project No One Leaves.

BCC, the law students informed owners, had been working to buy distressed properties back from the banks at the new, low market rates, and to then resell them to the original owners at near the newer, lower price, thus providing them the chance to stay in their homes at a lower monthly payment. It was a win-win scenario: the banks got to cut their losses, selling the properties they owned for more than they could sell most similar foreclosed properties; the owners got to keep their homes; neighborhoods that would otherwise end up increasingly abandoned and dilapidated got a shot at staying afloat; and the
BCC locked in a chance at making a profit by selling back to the owners at 25 percent over what it had paid for the property, as well as by getting the owners to sign a profit-sharing agreement in which half of all profits made if the owners flipped the homes got plowed back into the BCC house-buying pool of cash.

“We discovered the average outstanding mortgage amount [in these neighborhoods] was $325,000,” BCC head Elyse Cherry explained. “But if you applied any kind of underwriting criteria the average mortgage they could support was somewhere in the region of $150,000. We tried to reinvent the community bank, so we have a service relationship with our borrowers, we underwrite our borrowers.”

In 2009–10, the credit union purchased sixty properties, containing a total of ninety family units. The organization’s intent, if it could raise tens of millions of dollars in cash on the secondary markets, was to buy back hundreds more homes in the years to come, mostly in impoverished working-class communities of Boston. “We have a zero default rate,” Cherry asserted. “Eleven million dollars in lending and about one hundred families. We have no defaults.”

The Boston story drew national attention. Law school students from a number of universities around the country came out to Massachusetts to see how it worked. Several other community credit unions were established to provide similar help to homeowners elsewhere. There’s no good reason these models shouldn’t become a key part of state and federal housing strategy in the near future, with credit unions able to access low-interest federal startup loans in return for guaranteeing to keep given numbers of people in their homes.

More ambitiously, given the amount of toxic mortgage debt that the federal government was forced to buy up in the months following the 2008 collapse, there’s no reason that it shouldn’t use its status as a de facto lender of last resort to create similar profit-sharing agreements of its own with homeowners underwater on their loans or already skidding along the foreclosure route.

Why not allow these families to stay in their homes on hybrid rental-ownership agreements? They could pay the federal government
a monthly rent lower than their original, and ultimately unaffordable, monthly mortgage payment. Temporarily, the government would act as landlord, taking on upkeep responsibilities, making sure the property was insured. The rent money, minus a portion to be used for utilities, insurance, and maintenance, would be put into a dedicated account, administered by the government but in the name of the individual or family associated with the property.

If the newly minted renter wanted to move, he or she could—with no penalties, no outstanding debt. Unlike in a traditional foreclosure process, the government could let the person walk away without the action imploding his or her credit rating. In that case, the government would keep ownership of the property and would rent it out to other low- and middle-income residents. It would, essentially, become part of a growing pool of public housing. But if the ex-owners-cum-renters stayed current on their rent payments for a specified period of time, say five years, they would once more be considered homeowners, and the money in their account would be used to pay down the principal they still owed on the property.

Let’s assume that a person owed $100,000 on his home when he went into foreclosure and the government became his landlord. Let’s then say that each month, for five years, that person had paid $1,000 in rent, $500 of which was set aside into his dedicated housing account. After five years, there would be $30,000 in the account. If the individual reconverted to being owner of his property, he could immediately apply that $30,000 to paying down his principal, meaning that from that point on he would be making monthly mortgage payments on a $70,000 loan. Or he could pay down a portion of the principal and put the remaining money in trust to subsidize, and make more manageable, his future monthly mortgage payments.

Consider it a mortgage variant on being Born Again: a person who had originally put down almost no cash for a mortgage financed by a predatory loan would essentially spend five years, with the assistance of the government, building up a significant down payment so that he could then reenter the mortgage market to access a smaller
loan, payable to the government instead of to a commercial lender, with no predatory conditions attached.

There are many pluses to such a scenario. First, it would take large numbers of underwater properties off the housing market for at least five years, thus tightening the supply of for-sale homes and helping to kick-start local property values again. Second, it would keep homes occupied that would otherwise be abandoned, would prevent communities with large numbers of distressed properties from falling into blight, and would keep residents housed who would otherwise be at risk of homelessness. Third, it would build up a pool of affordable housing maintained by the government and available to low- and middle-income families. Fourth, the dedicated housing accounts would trigger a tremendous burst of enforced savings, moving large numbers of low-income Americans onto a more sustainable financial path for the rest of their lives.

Last, but by no means least, as with the BCC arrangements, and as with an array of profit-sharing housing cooperatives set up by trade unions in New York and elsewhere in bygone decades, when the owner came to sell, a portion of the profits, ranging from, say, 25 to 50 percent, would go back to the government. Out of the ashes of the housing conflagration, a huge reserve pool of money would be created for future investments in affordable housing projects nationwide.

BETTER SCHOOLS, BETTER COMMUNITIES

In addition to housing, the other crucial public investment to expand is that in schools, and, more generally, in the communities within which schools operate.

It might seem strange to have waited so long, within a book such as
The American Way of Poverty
, to tackle a topic so important. In fact, there’s nothing strange about it. It’s not that education is of less importance than housing and jobs, drug treatment and community
safety; clearly, education is of paramount importance. Rather it’s that absent a host of other changes occurring either before, or at the same time as, shifts in how schools approach teaching, educational reforms in isolation strike me as disconcertingly Sisyphean in nature: exhausting, and, too often, futile.

If that comes off as pessimistic, it shouldn’t. For the flip side of the equation is that with the right support network of reforms in place, with the sorts of holistic school-cum-community environments advocated by reformers such as Richard Rothstein, fixing the education system oughtn’t to be nearly as confounding a challenge as it has been portrayed to be.

Stable economic environments tend not to produce gangs, street-level drug markets, hunger, homelessness, and all the other daily facts of life that poor kids have to navigate in their communities. Less hunger, violence, and drug dealing tends to mean less disruptive classrooms. Less disruption inside the classroom means that teachers have more time to actually teach kids and engage with them educationally as opposed to trying to impose discipline on chaotic, and sometimes dangerous, situations. And more meaningful teacher-student interactions tend to lead to higher educational attainments.

In many ways, I believe, educational virtuous circles can be spurred at least in part by non-educational reforms. And many of those reforms are at the heart of the holistic anti-poverty strategy that I have detailed in the pages of this book. Absent those changes, absent the pathways to broader prosperity made possible by investments in job creation, by affordable healthcare, by large-scale changes in housing markets, and so on, the path to a renascent K-12, even with significant infusions of extra cash, is much rockier—which is why I’m not prioritizing a dedicated K-12 trust fund in the same vein as the EOF.