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The Debt Resisters’ Operations Manual

Chapter Five

Housing Debt: How the American Dream Became a Bait-and-Switch Nightmare

Many people struggle to find sympathy for those who have borrowed beyond their means to pay for something we all must provide for ourselves: housing. From the perspective of those who rent, have resisted taking on debt, or were fortunate enough to purchase and hold onto a home, it can be difficult to empathize with what appear to be bad choices. But when morality and debt intersect, appearances are often extremely misleading. The reality is that a great deal of what lenders, investors, and government agencies told the public about the housing market was never true. Decades of false promises, irresponsible practices, and collusion between banks and the government created a system in which lenders exploited the hopes and ambitions of people in the name of endless profit.

This chapter will explain how this culture emerged, how it exploits the most vulnerable among us, and what we can do about it.

The Story of the American Homeowner

You can’t escape the need for shelter. But in the United States, this basic need is entangled with a pervasive and often fervent belief in the American Dream—that anyone who works hard enough can achieve some version of comfortable “middle-class” status. For many of us, this status is most visibly realized by the purchase of a home. Given the prevalence of this sentiment, it can be easy to imagine that the relationship between homeownership and the “American Dream” existed from the beginning of time. But this central feature of our collective American identity was largely created in the 1930s when, in response to the Great Depression, the U.S. government began a partnership with private lenders. In order to stabilize the existing housing market, they began to construct an idea of homeownership as a fail-proof investment.

A new deal and the mortgage industry we know today

Before the 1930s, the majority of people in the United States did not own their homes. At that time, the ability to buy a house required that you either pay cash, or that you knew someone who would lend you the money. The lender could be a bank, but only if you had a good relationship with your local banker. Even then, they would only allow you to borrow 50% of the property value, and you had to pay it off in three to five years.

In spite of the relatively low ownership rates and direct limits on mortgage access, a housing debt crisis similar to the one in 2008 emerged. Property values plummeted and mortgages destabilized. Lenders refused to renegotiate and borrowers defaulted. At the lowest point of the crisis, one in every ten homes was in foreclosure. In the 1930s, most banks had no government support or backing to sustain them during a crisis. Without money coming in, they were unable to lend, which resulted in freezing credit and dragged the country further into depression. In order to stabilize the market and open the flow of credit, the federal government intervened and established the entities we have today: the Home Owners’ Loan Corporation (1933), the Federal Housing Administration (1934), and the Federal National Mortgage Association (1938), later known as Fannie Mae. These institutions were created to underwrite the lending system, create new terms for borrowers, and unlock credit for the banks to continue lending. Essentially, these institutions functioned so that the private banks could continue making loans and profit from the higher interest, while shifting the increased risk to the public. This partnership between the banks and government agencies continues today with almost all mortgages on the books of FHA, Fannie Mae, Freddie Mac, and Ginnie Mae—in other words, they are guaranteed by taxpayers. In 2011, the federal government guaranteed more than 95% of all mortgages, making the U.S. taxpaying population the largest backer of home loans and shielding the profiting industry from resistance or further collapse.

The ownership society as a tool

Against the workers

Expanding homeownership was a response by government and banks to the debt crisis of the Depression—a means of maintaining credit in the system and restoring faith in a failing economic order. It is quite apparent how the banks benefit in this relationship, outsourcing the risk of their own practices to the public via government intervention. But what is in it for the government? Why go through such lengths to expand an ownership society that was clearly struggling to maintain itself?

During the Depression, union membership hit record highs, growing from 7% in 1930 to 25% in 1940. This development threatened the power of industry and employers, and seemingly had the potential for continued growth. Public dollars were used to create a state-supported market where workers would individually receive support for financing their homes. This had the effect of propping up the competitive housing market without further strengthening the working class as a whole through direct aid. Far from an American dream, the resulting system of homeownership has created a mass of disenfranchised debtors, beholden to the debt system. As homeownership (and mortgage debt) climbed, union membership began its steady decline in 1945.

Against veterans

During the same period of union growth, World War I veterans mobilized against the government. In payment for their war service (1914–1918), veterans were offered bonus certificates in 1924 that would not be redeemable until 1945, a full twenty-seven years after the war. As the country moved into the Great Depression, veterans were particularly vulnerable to joblessness. With few alternatives, forty-three thousand marchers took to the U.S. Capitol building in 1932 demanding that they receive their payment. Even after their camp was cleared, belongings burned and several veterans killed by police, resistance continued. To pacify the movement, jobs were offered to the veterans within the New Deal. Most of them took the jobs before Congress agreed in 1936 to pay the bonuses early.

This powerful movement and others like it illustrated the threat that organized veterans could pose at the end of each subsequent war. In response, complex packages were developed to compensate service members for their duty. Just as before, however, the choice was made to provide forms of compensation that encouraged entrance into competitive markets and the taking on of individual debt to avoid further empowering group strength. Mortgage options became a feature of individual veteran compensation. Under the GI Bill, the Veterans Administration Mortgage Insurance Program was developed as part of the deferred compensation package for service in the armed forces. Returning veterans of World War II were given very low mortgage rates to encourage entrance to the market as individuals, and the practice of the thirty-year loan with 95% financing became a new norm. With the “success” of these new long-term loans, banks began to offer them to the general population with government backing. The market expanded enormously, and by the 1970s homeownership had grown to 63% of the American public—and mortgage debt became an all-too-essential part of the American experience.

Communities of color and links to the poor

The link between racial disparities and homeownership began early on. In the early 1900s, the homeownership rate for Blacks was at 21% while that of Whites was 49.4%—a nearly 30-point ownership gap that continues to this day. Regulations such as the Jim Crow laws purposefully kept Blacks from expanding into the housing market and joining the ranks of those accumulating wealth for their subsequent generations. The New Deal packages referenced earlier were largely reserved for working-class Whites, placing them at odds with workers of color and further fracturing the working class along racial lines. During the Civil Rights era, peaking in 1960, a new kind of consolidated power emerged. As communities of color organized and created powerful movements, the familiar tool of individual debt was used again.

The competitive market was again expanded to contain a surge in power. In the 1970s, growing anger about the longstanding practice of redlining (lending discrimination that divides communities along racial lines) moved the government to pass the Community Reinvestment Act (CRA), which required banks to conduct business in the entire geographic area in which they operated—the idea being that one area could not be more favored (or ignored) than another in terms of approved mortgages and lending. Rating systems were established to penalize those banks showing evidence of bias. Still, as late as 1992, a study by the Federal Reserve Bank of Boston claimed that people of color were denied mortgages at higher rates than Whites. In response, the industry, backed by the federal government, was called on to broaden access to mortgage credit and homeownership by reducing its qualifying standards.

The stated goal of President Clinton’s “National Homeownership Strategy: Partners in the American Dream” program was to extend homeownership to eight million low-income buyers. But the government’s perverse response to racial economic inequality increased availability of credit and the expansion of crushing mortgage debt, rather than the provision of direct assistance through extended public or subsidized housing—further enlarging the market and incorporating a significant new segment of the population into the ownership/debtor relationship.

Through these direct government mandates and the promise of trillions of dollars in revenue, the door was open for the lending industry to develop complex new products, specifically targeted at low-income households and communities of color—all of which were intentionally confusing, overwhelming, and generally designed to fail the borrower. While the burden of public housing was lifted off of the government’s shoulders, mortgage debt was coming down like a ton of bricks on unsuspecting families. “Get-rich-quick” schemes used new financial products to exploit the hopes of millions. A litany of how-to books reinforced the blind faith of the market: How to Make Millions in Real Estate in Three Years Starting with No Cash (2005); Frank McKinney’s Maverick Approach to Real Estate Success: How You Can Go from a $50,000 Fixer-Upper to a $100 Million Mansion (2005); Wise Women Invest in Real Estate: Achieve Financial Independence and Live the Lifestyle of Your Dreams (2006); Why the Real Estate Boom Will Not Bust—And How You Can Profit From It: How to Build Wealth in Today’s Expanding Real Estate Market (2006).

Let’s say you were dubious about the promises being offered. Like anyone ready to make a major decision, you did your research. You took a trip to Fannie Mae’s mortgage calculator and tried to assess the risks. You imagine your worst-case scenario—your property value goes down. What would that look like? You would have received an error—literally. The mortgage calculator was incapable of forecasting a future of zero or negative growth because they assumed that property values always rise. The message became, “The time to invest is now.” Unfortunately, that is exactly what many people did, entangling themselves in unforeseen obligations, a lifetime of debt, and a bubble about to burst.

Some of the worst lending practices include adjustable rate mortgages (ARM) where after several years the initial interest rate adjusts (often substantially higher), placing a lender in a situation where the original math that made the loan affordable no longer applies, only the interest is paid and the principle debt grows endlessly. “Piggyback mortgages” made the down payment for a first mortgage possible with the taking out of a second “piggyback” mortgage. Stated income loans (a.k.a. “liar” loans) allowed borrowers to simply state their income with no verification and enter into mortgages beyond their means. Interest-only payments, negative amortization, and hybrids of all of the above empowered the banks to entangle anyone with a desire for a home, stability, and wealth in a debt scheme they previously would have never qualified for.

In order to back these high-risk loans, banks divided the debt into pools with mixtures of risk, making it impossible to separate the reliable from the dangerous and selling units of these pools in secondary markets with completely unwarranted guarantees of security. It turned out to be a huge success—for the banks.

And yet, despite lenders’ consistently reckless and predatory behavior, the dominant narrative is so often warped by the “morality” of the debt system. Again and again, we are told the story of the irresponsible homeowners who borrowed beyond their means and must now live with their poor choices. But the risk of a loan is supposed to be assessed both by the borrower and the lender. After all, if you are asked to lend someone money, determining the likelihood that you’ll actually get it back is part of your decision process. However, in the current financial system, the government has underwritten the majority of the banks’ risks. The government has guaranteed that these lenders will always get their money back, plus interest. And even if you wanted to hold someone accountable, the actual originators of these toxic loans are often obscured by complex chains of repackaging, offloading, and reselling—leaving millions of borrowers with no direct lender to negotiate with, no access to federal aid, and all of the blame.

The Current Nightmare

  • Approximately 14% of all homes in the United States are vacant.
  • Pockets of extreme decline exist across the country. In Dayton, Ohio, for instance, the vacancy rate is 21.1% and median income has fallen 10.7% in two years.
  • The rate of homeownership in the United States has dropped to 1996 levels (65.3% from its 69% peak in 2004).
  • Over four million homes have been foreclosed on since September 2008.
  • Negative or near-negative equity accounted for 27% of all U.S. mortgages in 2012, affecting 10.8 million borrowers.
  • Approximately 25% of all Black and Latino/a mortgage-holders lost their home to foreclosure or are in threat of foreclosure, as opposed to just under 12% of White borrowers.

With figures as far-reaching as these, housing debt needs to be understood as a highly complex issue concerning us all both financially and ethically. The common “blame the victim” account of the subprime mortgage crisis ignores the fact that the industry developed complex financial instruments to expand the market through unsound and, in an overwhelming number of cases, fraudulent means, ultimately causing the system to collapse. Many of these “mortgage innovations” or “relaxed lending practices” were in fact trapdoor schemes to extract wealth from borrowers with false promises and exploited desires.

If you are currently struggling with a mortgage or foreclosure, you are not alone. Review the resources below to consider your options and where you can find aid. If you are not going through difficulties with your mortgage, support those you know who are by sharing this information and expressing your solidarity.

Preventing Foreclosure on Your (and Your Neighbor’s) Home

Let’s say you’re having trouble making your mortgage payments, or you’ve already gone into foreclosure but you want to stay in your home. What can you do? You have several options, ranging from individual to collective, low-risk to high-risk, legal to not-so-legal.

Individual strategies

1. Explore federal mortgage modification programs. You may qualify for government relief under a range of programs established in the wake of the housing market collapse, most of which are administered through the Treasury Department and the Department of Housing and Urban Development (HUD). These include the Making Home Affordable Program (MHA), the Home Affordable Modification Program (HAMP), and the Principal Reduction Alternative (PRA) (for significantly underwater mortgages). If your mortgage is insured by the Federal Housing Administration (FHA), there are additional loss mitigation programs available. Each program has complicated eligibility requirements, which you can learn about on the HUD website. Then, ask your lenders and loan servicers about your options. If you run into difficulties, the HUD website has a list of organizations that can contact lenders and servicers on your behalf.

2. Negotiate with your lenders, ideally with some help. In seeking professional help, generally watch out for frauds and scams (for example, if you’re asked for a lump-sum fee up front). Anyone looking to take your mortgage payment and give it to the bank is untrustworthy; you’ll want to pay the bank directly. Anyone who promises you a silver bullet is probably lying.

  • Consult a housing counselor. Organizations like the Neighborhood Association Corporation of America (NACA) can point you to an accredited housing counselor experienced in negotiating with banks. Note that some housing counselors have a vested interest in building up their businesses and may be funded by banks; some are straight-up frauds.
  • Consult a lawyer. If you cannot afford a lawyer, seek out local legal aid organizations, bar associations, or community-based organizations (e.g., housing justice organizations) for discounted or free legal services.
  • Consult community-based organizations specializing in housing issues. Particularly in major metropolitan areas, there are organizations that can offer general advice and support with your housing issues. Some unions also do this. These organizations may also help you partake in collective action to win larger victories (see “Collective Action” below).

3. Walk away. Walking away from—that is, strategically defaulting on—your mortgage is always an option. The personal finance world went ballistic when Suze Orman advised homeowners who are more than 20% underwater to walk away. But if you’re that far in the hole, cutting your losses may be your best option. Entire communities are finding themselves in a vicious cycle of foreclosures driving down property values, which in turn reduces property taxes and therefore municipal income. Municipal indebtedness grows and public services suffer, further driving down property values. This death spiral is often impossible to escape. By strategically defaulting, you remove yourself from the poisonous cycle of individual and collective indebtedness and depreciation.

You can decide to walk away immediately, or after taking some intermediate steps to explore the full range of options. These steps include:

  • Ask your lender to modify the loan by reducing the principal to the actual current value of the property.
  • If they say no—which is likely—then ask for a short sale. A short sale is a sale for less than the amount owed for a property, and the bank takes the loss. Most often banks will say no to this, too.
  • As a last step, ask for a deed in lieu of foreclosure. This will allow you to transfer the property deed to the bank without going through formal foreclosure proceedings. The advantage for you is that it allows you to walk away immediately and with no attachment to the property. The advantage to the bank is that they may save money and lower the risk of borrower vandalism of the property.

Of course, this exit doesn’t come for free. Before you walk away, be aware of the consequences of foreclosure. Aside from the loss of your home, your credit report and credit score will take a big hit. You can expect your score to drop by 85 to 160 points. The foreclosure stays on your report for seven years and will impact your credit for that period, although it is impossible to know how much the impact will dissipate over time since credit reporting agencies do not disclose their algorithms. But without a doubt, it will be difficult to get another loan for quite some time. One thing you should certainly do is dispute the foreclosure with the credit reporting agency, forcing them to validate your credit report. CRA records are often inaccurate, so dispute them until they show you your signature on the loan documents (see Chapter One).

You might also consider walking away from your mortgage in strategic alliance with other homeowners facing foreclosure—in other words, participating in a mortgage strike. If done correctly, a mortgage strike could drastically increase your community’s leverage against the banks. It is essential that you consult an attorney in this case because unlike tenants in a rent strike, homeowners in a mortgage strike have no support in the relevant laws.

4. Rent instead of owning. Although rent is not considered consumer debt, owing rent is certainly a form of indebtedness. This becomes obvious if you do not pay your rent. Your landlord will eventually evict you and you will owe “back rent.” The similarity between owing a bank money for shelter and owing a landlord money for shelter becomes clear when the bank threatens to take away your home. Just as a bank keeps a down payment to cover a potential default, a landlord typically requires the tenant to provide a security deposit to be deposited in an interest-bearing escrow account to guarantee rent.

A recent Pew study showed that younger people in the United States have soured on buying and are less attached to the dream of homeownership. The younger generation has seen its families suffer from underwater properties and fears the downside of ownership more than it desires the upside.

Be warned, however, that renting will not necessarily save you from the overall effects of housing debt. Since the foreclosure crisis, rents have overwhelmingly increased and in 2011, rental vacancies hit a ten-year low. Millions of foreclosed families have no choice but to rent, and since it takes seven years for a foreclosure to disappear from your credit report, many families are in it for the long haul. Of course, wages have not kept pace with rent increases and rent is eating up a growing portion of peoples’ incomes. This outcome is also felt very unevenly. For example over 25% of Black and Latino/a families spend more than half their income on housing compared to 15% of White families.

Unfortunately, no one has been immune to the fraudulent practices that led to this mess. Unsustainable housing debt impacts us all.

Collective strategies: We are forty million strong

What does all this add up to? U.S. homeowners have been victims of a bank scheme to profit by creating a bubble that could only blow up in individual homeowners’ faces. Since we are all affected by the housing crisis, the potential for collective action is enormous. For systemic change that benefits us all, we need to build power through acting together.

There are an estimated forty million residents of underwater homes today, greater than the entire population of California. There’s $1.15 trillion in just the underwater portion of mortgages, and $4.8 trillion in total estimated property value of underwater homes. Given these numbers, it’s easy to see the potential for homeowners to unite under the threat of strategic default. In 2008, the federal government passed the $700 billion Troubled Asset Relief Program (TARP) to bail out banks. TARP specifically called for the government to encourage banks to modify loans to prevent foreclosures. However, very little money has actually been used to bail out homeowners and the banks have done little to change their lending practices to help people to avoid losing their homes. In fact, the review of loans in foreclosure by banks and their consultants was botched so badly that they reached a $3.6 billion settlement with regulators, providing cash relief to homeowners who entered foreclosure in 2009 or 2010. These homeowners suffered illegal foreclosures, including foreclosures despite never having missed a mortgage payment. More than half a million homeowners were deprived of a loan modification or other loss mitigation assistance. Clearly, we can’t rely on the government to clean up this huge mess that speculators caused.

Eviction/auction blockades

Activists have long used their bodies to blockade evictions of foreclosed homeowners and auctions of foreclosed homes. Blockades give you more leverage to negotiate a better deal with the bank because banks hate public pressure, especially around specific homeowners. Banks are softer targets than you might expect because so many cases are rife with legal irregularities and outright fraud; it’s not uncommon for customers to be mislead, crucial paperwork lost, and documents robo-signed. With a little help from your friends, you can use this against the banks.

Blockades raise the cost of foreclosing for the bank, which is helpful on both individual and collective levels. In Minneapolis, for example, thanks to the work of sixty activists from the grassroots group Occupy Homes MN, it took police four attempts and thirty-nine arrests to evict one family in the spring of 2012. The whole effort cost the city $40,000 (the city had to attack the front door with a battering ram), a fact that Occupy Homes MN publicized to shame elected officials for the misuse of public resources.

Eviction and auction blockades can also serve as part of larger anti-eviction and anti-foreclosure campaigns that call on the legislature to put stronger legal protections in place for homeowners and moratoriums on evictions and foreclosures. Such reforms are a source of relief for many.

What are the economics that justify eviction and auction blockades? When a home is underwater, the lender has already lost its initial investment because it will have to resell the house at today’s depressed fair market value. Who benefits from that resale to the market? Often they are “vulture fund” investors who have a lot of cash to shop for deals in distressed neighborhoods, only to gentrify those neighborhoods or quickly “flip” their investments in order to make a profit. They benefit from foreclosures at the expense of family, community and—if the mortgage is insured by Fannie Mae or Freddie Mac—taxpayers (who must repay the bank the amount of the original mortgage).

What demands should blockaders make? The most immediate demand is to halt or reverse foreclosure, or at least eviction in the wake of foreclosure. Our first goal is to stop a human being or family from becoming homeless. The next is a “principal reduction”—a new loan based on the house’s current value. The benefits of principal reductions would ripple out far beyond any particular homeowner: Fannie and Freddie could save taxpayers billions by adopting principal reduction because odds are better the homeowner will be able to keep making payments and avoid default (or re-default).

Those in charge argue that principal reductions—achieved by selling homes back to foreclosed homeowners—would create a “moral hazard,” encouraging others to default on their mortgage. The term “moral hazard” is used to describe a situation where a person (or a corporation or other unit) takes undue risks because they know that someone else will bear the consequences of their risky action. The important thing to recognize is that corporations do this all the time—for example, corporations pollute with impunity because they do not bear the costs of such pollution themselves. In the housing market, banks extended risky, speculative mortgage loans to homeowners, knowing that if things were to go south, homeowners would suffer the consequences, not the banks. “Moral hazard” has nothing to do with morality and everything to do with particular distributions of power and risk. The question is, what types of “moral hazard” are we willing to tolerate?

Mortgage strikes

Rent strikes are a time-honored tactic for tenants to demand action from a delinquent landlord. Despite the lengthy history of rent strikes to gain repairs and other concessions, there is little history of mortgage strikes. There are many reasons property owners are unwilling to strike—attachment to homeownership, guilt about failing to pay debts, fear of bad credit, and hope that the market will improve. But as more and more victims of the housing market understand the complicated details of the game our government played with the banks at our expense, the potential for collective action grows.

Rent strikes work (although the risk of eviction is real) because under the lease and the landlord-tenant law regime, the landlord must perform its duties (such as keeping the premises habitable) for the tenant’s duty to pay rent to kick in. How are mortgage strikes different from rent strikes? Unfortunately, the law does not protect homeowner-borrowers as much as it does tenants. This is a product of our society’s pro-creditor bias, as well as the lack of a powerful mortgage debtors’ movement. We mustn’t forget that the legal protections for tenants making rent strikes possible did not always exist—they were obtained through collective action throughout the 1960s and ’70s. (In the DC Circuit case, Javins v. First National Realty Corp., the court determined that if the premises become uninhabitable, the tenant is freed from their obligation to pay rent. The tenant’s duty to pay rent was traditionally regarded as independent of whether the landlord fulfilled their duties.)

People in the U.S. are beginning to come together to organize mortgage strikes. A community-based organization called Empowering and Strengthening Ohio’s People (ESOP) has modeled its mortgage strike on rent strikes under Ohio law, which uses a court-supervised process. In a rent strike, tenants pay their monthly rent to the local court clerk, who holds the payments in escrow until the tenants’ complaints are resolved. A mortgage strike would follow a similar structure, although it is not specifically authorized by Ohio law (making it highly risky). Participating homeowners would send money orders covering their regular principal and interest payments to a local attorney to hold in escrow until the homeowners explicitly release the payments. The attorney’s role is to provide an escrow service so that the mortgage servicers and lenders are assured of payment after the strike. By collectively withholding mortgage payments through this escrow mechanism, underwater homeowners can increase their negotiating leverage vis-à-vis their shared lenders and servicers.

City Life/Vida Urbana (CLVU), a community-based organization in Boston has been actively organizing mortgage debtors’ unions, or “Bank Tenant Associations”—a product of three decades of grassroots organizing. The model is being replicated across the country (and, for better or worse, is funded by national and international foundations). Bank Tenant Associations get the message out to the community, build solidarity, provide access to lawyers, organize creative actions that apply public pressure and attract media attention, and build leadership in the bank tenants themselves. CLVU has established Bank Tenant Associations with thousands of bank tenants who have stopped evictions, passed new laws, put pressure on the bank to sell back homes at half or less of the original loan value, and radically changed both lender and court culture. To give just one example, CLVU is initiating a pilot project in two organized neighborhoods to convert occupied foreclosed buildings into permanently affordable, resident-controlled homes. These grassroots movements can only lead to a broader, national demand for principal reduction and prioritizing affordable housing going forward.

CLVU has published a Bank Tenant Association Organizing Manual that details the myriad steps and dynamics of organizing a mortgage debtor’s union. Among other things, the manual includes creative ways to partner with community (not-for-profit) banks, which can buy underwater properties and sell them back to homeowners at their real value (a better result than in most loan modification efforts by for-profit banks), and much more.

Home Is Where the Heart Is: Creating a Housing Commons

Blockades and mortgage strikes are powerful tactics to prevent foreclosures right now, but let’s not lose sight of our ultimate vision: a world where housing is a human right and an asset of the commons. To that end, we can continue historic commoning practices such as taking over and rehabilitating vacant homes and maintaining community land trusts (which allow the community to own land based on principles of democracy, affordability, and sustainability). We have seen how the irresponsible forces of the market have wrecked homes and lives. We must build our own resilient homes going forward, and that is most likely to succeed if we do it together.

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