In 2011, the Arizona Court of Appeals affirmed a tenant must receive a 90 day notice before a foreclosure eviction. See De Meo Case: http://nhlp.org/node/1265

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the gorgeous, purple-and-green-lit Lower East Side headquarters of the Angel Orensanz Foundation, nearly 300 techies, activists and thinkers gathered, shouting out ideas for social justice-minded Web projects that they would break into small groups to attempt to hash out in a day.

A man in a plaid shirt stood up and told the moderator and the crowd, “I want to create a tool for organizing debt strikes.”

The man was Thomas Gokey, an artist and adjunct professor at Syracuse University, and his idea wound up one of the four “winners” at ContactCon, a conference hosted by Douglas Rushkoff that urged people to think of solutions to the problem of the corporate-controlled Internet—and by extension, the world. The project, nicknamed “Kick-Stopper,” is in the works, but Gokey notes that he’s far from the only person out there suggesting, especially in the wake of Occupy Wall Street’s successes, that it’s time for some more serious, organized direct action around the issue of debt.

“I wanted to do this project because I kept having the same basic conversation with everyone at Zuccotti and everywhere else,” Gokey told me. “When I talk to people about what we could do that would really compel Congress and Wall Street to meet our demands or really alter the current system, we inevitably start discussing what non-cooperation with our own oppression would look like. What does it mean to stop cooperating with the banks? What we inevitably end up describing is some variation of a debt strike, simply ending our own participation in a system that exploits us.”

Are debt strikes, then, the next logical step in the fight against Big Finance’s domination of the 99 percent?

Republic of Debtors

One of the fascinating things about the media dominance of Occupy Wall Street has been how the conversation has shifted away from the deficit-obsession of the last few years. Suddenly the debt that everyone is talking about is personal, individual debt—student loans, mortgages, credit cards and other ways the big banks control our lives.

“That’s one of the things, debt really does tie the 99 percent together. Everyone who is under the 99 percentile saw a debt runup in the 2000s,” Mike Konczal, finance blogger and fellow at the Roosevelt Institute, told me. “You can talk about ‘the richest 1 percent makes this much money,’ but part of what they’re making is debt. Their wealth is a claim on everyone else’s future income.”

That debt was for many years a substitute for wages in the pockets of many Americans. As incomes stagnated or even shrank, credit cards and home equity filled the gap—until the housing bubble popped, leaving millions underwater on their mortgages, owing more than their homes were worth, and unable to get more credit cards or even make the minimum payments on the ones they had.

Many have noted that what happened in 2007 and 2008, when the banks were handed billions in bailouts and secret ultra-low-interest loans, was essentially a capital strike. Finance essentially said that if they didn’t get bailed out, they’d shut down the system—stop lending, jam up the works, and make life miserable for everyone.

Yet those same banks, once bailed out, have flatly refused to do the same for a nation of borrowers thrown into crisis by their actions. Their argument seems simple—the borrowers knew what they were doing, it’s their obligation to pay. Most borrowers agree, and struggle to make payments on credit cards with 20 percent rates and student loans for educations that didn’t help them find jobs, on homes that have plunged in value thanks to predatory lending.

Rep. Hansen Clarke, a Democrat from Michigan, recently noted that in fact a record amount of consumer debt is hurting everyone, writing on his Huffington Post blog: “Such high interest rates — and high levels of household debt more generally — have more of an impact on most Americans’ real disposable income than higher European-style levels of taxation. They reduce Americans’ purchasing power, which means they reduce demand for American goods and services and, in turn, worsen our employment situation. The situation is similar with mortgages and student loans.”

So wiping out some of that debt, most of which is owed to the same banks that broke the economy in the first place, would in fact be an economic stimulus. Why has there been no action?

David Graeber, anthropologist and author of Debt: The First 5000 Years, told Naked Capitalism, “If you want to take a relation of violent extortion, sheer power, and turn it into something moral, and most of all, make it seem like the victims are to blame, you turn it into a relation of debt.”

Strike?

Steven Katz, founder of Debtorboards.com, recently explained to Mother Jones how he’s evaded paying $80,000 in credit card debt. His Web site informs debtors of ways they can fight back against the banks; everything from filing suit against collection agencies to shielding your assets from seizure—and it has more than 10,000 members.

A woman recently posted a video to YouTube (which thus far has over 500,000 views) calling for a debtor’s revolution. “Had you left me alone I would have continued to make my payments in good faith,” she says, but the hike in her interest rate to 30 percent has changed her mind.

“There is power in numbers,” she notes, and that’s where the idea of an organized strike comes in. One person can be hounded, harassed, and scared into submission, but when enough of them work together, could the banks be pressed into backing down?

Stephen Lerner, a veteran organizer with SEIU, recently was called a terrorist for suggesting that perhaps homeowners, stuck with mortgages that are more than the value of their homes and banks that refuse to write down the principal on those loans, should band together and refuse to pay their mortgages until the banks decide to negotiate. A kind of collective bargaining for homeowners whose wealth was wiped out by the financial crisis, those who cannot pay their bills and those who can (for now) but still would benefit by spending that money elsewhere.

“What is the critical mass?” Lerner asked me. “The beauty of the underwater strike is that it would cause a crisis for the banks, which would mean they couldn’t ignore the issue and would be forced to negotiate with homeowners. The big question is what’s the number you’d have to hit to force them to negotiate?”

“The problem is that a debt-strike will take a lot of coordination to make it work,” Thomas Gokey points out, “It can’t just be one person who is willing to risk their financial life, it only works when there are millions of people who are willing to take that risk together, and they are only going to take that risk if they can feel confident that everyone else has got their back.”

That in part is what Gokey hoped to solve by bringing the debt strike idea to ContactCon, but it’s not the only one. Lerner points out that the debt strike also needs targets, demands and an answer to the question, “Who pays?”

“There should be debt forgiveness, but these guys–the student loan profiteers–should eat it, not the government and taxpayers,” he points out. “The banks should pay because they destroyed the economy, they sucked 18-year-olds into predatory loans they are stuck with for life.”

Banks have already, Mother Jones notes, written off some $90 billion in credit card debt since 2008, taking it off their books because it’s unlikely to ever be recovered. Some nonpayment is built into the system—as Graeber notes in his book Debt: The First 5000 Years, “A lender is supposed to assume a certain degree of risk. If all loans, no matter how idiotic, were still retrievable—if there were no bankruptcy laws, for instance—the results would be disastrous. What reason would lenders have not to make a stupid loan?”

Aside from the fact, of course, that we wound up with an $8 trillion housing bubble from just those sorts of bad loans, there is in the US one type of debt that cannot be discharged in bankruptcy, that follows you for life and that has the full power of the US government behind its collection.

I’m speaking, of course, of student loans.

The $1 Trillion Problem

The student debt bubble is officially over $1 trillion, and as Lerner noted, it largely consists of loans made to 18-year-olds under the premise that education will help them earn enough money to pay off their loans. Yet the job market is terrible (and nearly twice as terrible for young people as it is for everyone else) and meanwhile cuts to public education, both ideologically motivated, from conservatives, and because of state budget crises caused by the economic crisis the banks created, have made that education much more expensive.

In the spirit of the now-famous WeAreThe99Percent Tumblr blog and inspired by Occupy Wall Street, there is now an OccupyStudentDebt Tumblr, where students and grads post their photos and stories of their debt. “The student loan bubble may not burst with a bang, but it is slowly suffocating us,” the sidebar reads.

But student debt, as Mike Konczal has noted, is literally debt you carry for life. It has no statute of limitations, cannot be discharged under bankruptcy and the government can literally deduct it from your Social Security check. ProPublica recently investigated the struggle of severely disabled borrowers, legally allowed to have their student debts forgiven, to actually get their loans discharged.

Konczal wrote:

“As credit card and housing debt become unbearable, there’s a point at which they get written down. That point is too high, but because of various laws regarding debt collection that shift the strategy and potential end results between the actors, there’s a logic to it. As far as I can tell, there’s simply no equivalent chart, or even logic, for student loans. Because of legal choices we’ve made in how to set up this relationship, it stays forever, is virtually impossible to discharge under hardship, churns fees when it goes bad, and creditors can get to anything, including Social Security, to get it repaid. Meanwhile, we have a Great Depression-like event that is throwing college graduates into a labor market that is far too weak.”

And defaults are up anyway. Phil Izzo at the Wall Street Journal reported in August that 11.2 percent of student loans were more than 90 days past due—and if it kept rising, could pass credit card debt, which is at 12.2 percent but is on a decline.

Obama’s new plan to help students with their loans will provide some relief, but only for current students. Those who have already graduated—the majority of the student loan bubble—are ineligible. Rep. Clarke suggested making private student loans, “particularly those written under unfair terms” dischargeable in a bankruptcy, which is a nice sentiment. But right now there’s absolutely zero likelihood of this do-nothing Congress taking action, and Occupy Wall Street has proven that a sizable number of Americans are in a mood to do things for themselves rather than waiting for government action.

So a student debt strike might actually be the most powerful statement to make, as there are literally no other options for those stuck with the burden—many of whom form the backbone of the occupations around the country.

But Konczal warned that it’s also very hard to win a battle with the government, which backs the student loans even if they are held by private banks. “The way game theorists think about bargaining is that it’s very important to understand how patient each side is. The side that’s more desperate will lose out. In theory the government has an infinite amount of patience. It has no kind of fidicuary cash logic, it also has people with guns and boots and jail cells and the ability to literally take out of your paycheck,” he told me.

Risking Your Financial Life?

Even without the power of the federal government behind your debts, damage to your credit rating can have long-term consequences that anyone thinking about a debt strike should consider.

Kate Sternwood (not her real name), who defaulted on her student loans after leaving the University of Massachusetts before completing her degree, told me, “My credit is so bad that I can’t even do things to get good credit.” Collection agencies hounded her for private loans within the first year of leaving school; she noted that it took 5 years for the Department of Education to do the same, to tell her “We can garnish your wages.”

Colleen Williams explained what happened when she couldn’t pay her loans: “When I went into default, the government began by confiscating my tax returns – if you have any outstanding debts with the government, including student loans and child support, they will keep your tax return money & supposedly apply it towards your debt, which I don’t think they do, ever.”

She continued, “So after years of this happening, they finally sent my defaulted loans to a collection agency. Two years after that–it does take quite a while for them to catch up to you, but they will definitely catch up to you–they started legal action to garnish my wages. Most people think that’s not that big of a deal, but it is absolutely humiliating to explain to your work that you let your student loan debt go because of unemployment and now you can’t even make payments on it, they want the full $35,000 (or whatever amount you owe) or they will just forcefully take it from you.”

“I actually started a rehab program that brings you out of collections and puts you with a regular bank,” Sternwood said. “I paid six of the nine months of the rehab program before I got laid off in the middle of 2009.”

A report from the Consumer Financial Protection Bureau in July of this year [PDF] said of credit ratings:

“Credit scores can have a significant impact on a consumer’s financial life. Lenders rely on scores extensively in decision making, including the initial decisions of whether to lend and what loan terms to offer, for most types of credit, including mortgages, auto loans, and credit cards. Credit scores also influence the marketing offers that consumers receive, such as offers for credit cards. Further, credit scores affect account-management decisions, like raising or lowering credit limits or changing interest rates. A good credit score can mean access to a wide range of credit products at the better rates available in the market, while a bad credit score can lead to greatly reduced access to credit and much higher borrowing costs.”

The report also notes that rating consumer credit and selling access to those ratings is a $1 billion business—one quarter of which is selling consumers’ ratings back to them.

Elizabeth Warren, Senate candidate, inventor of the CFPB, and bankruptcy law expert, wrote in 2009 that credit card companies had effectively gotten bankruptcy law changed in 2005 to make credit card debts harder to discharge in a bankruptcy filing as well, and pointed out the power of the other side: “Credit card companies can hire lawyers and develop extensive debt collect departments.”

Asked about the idea of a debt strike, Sternwood said, “I think the people who would be the first to strike would be the people who have already defaulted.” Once your credit is already tanked, perhaps the idea of giving it another hit isn’t quite as threatening.

Making It Happen

At ContactCon, the debt strike group discussed what would be necessary to help organize debt strikes, and debated whether the best plan was to hold money in escrow or to funnel it back into the economy when not paying. The group wound up growing, and was nominated as one of the ideas people would like to see happen. Attendees voted on four, and Kick-Stopper was selected as one of Contact’s “Most Actionable” ideas.

“We’ve tentatively planned on holding a 54-hour hackathon later in November or in early December to start building the platform and continue to work out the idea,” Gokey says. “I don’t think there is any need to re-create campaigns like Move Your Money. A debt strike takes things to the next logical level and would have a much bigger impact than just moving our personal savings accounts, it would stick a wrench in the gears of capital and bring everything to a grinding halt. It would give us tremendous power to back up our demands, but it would take a complex grassroots democratic organization to succeed.”

Many ideas were discussed for the platform, which would act as a sort of social network for horizontally organized, networked strikes. Users could possibly share their personal stories as well as which banks hold their debt, and coordinate with other debtors in their area or who owe money to the same bank or for the same problem to maximize impact.

In many ways, the combination of online/offline activism is the hallmark of the Occupy Wall Street movement, organized with the help of hacker groups like Anonymous and promoted through citizen media like livestreams, camera phone videos and Twitter, but solidly grounded in real-world action. Creating a Web application to organize something like a debt strike would be another step in marrying direct action with the ability of the Web to connect people across the country.

“Contact is about unlocking the potential of the networked era, and a strong networked organizational structure is what we will need to maintain a large-scale debt strike of millions of people,” Gokey said. “In a lot of ways, a debt-strike is a low-tech thing, but our networked technology can help us organize it.”

Sarah Jaffe is an associate editor at AlterNet, a rabblerouser and frequent Twitterer. You can follow her at @seasonothebitch.

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I’m here today to talk about a crisis unlike any we’ve ever known – but one that you know very well here in Mesa, and throughout the Valley. In Phoenix and its surrounding suburbs, the American Dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods. It is a crisis that strikes at the heart of the middle class: the homes in which we invest our savings, build our lives, raise our families, and plant roots in our communities.

So many Americans have shared with me their personal experiences of this crisis. Many have written letters or emails or shared their stories with me at rallies and along rope lines. Their hardship and heartbreak are a reminder that while this crisis is vast, it begins just one house – and one family – at a time.

It begins with a young family – maybe in Mesa, or Glendale, or Tempe – or just as likely in suburban Las Vegas, Cleveland, or Miami. They save up. They search. They choose a home that feels like the perfect place to start a life. They secure a fixed-rate mortgage at a reasonable rate, make a down payment, and make their mortgage payments each month. They are as responsible as anyone could ask them to be.

But then they learn that acting responsibly often isn’t enough to escape this crisis. Perhaps someone loses a job in the latest round of layoffs, one of more than three and a half million jobs lost since this recession began – or maybe a child gets sick, or a spouse has his or her hours cut.

In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments. Or you could have refinanced your home at a lower rate. But today, home values have fallen so sharply that even if you made a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment.

You can’t afford to leave and you can’t afford to stay. So you cut back on luxuries. Then you cut back on necessities. You spend down your savings to keep up with your payments. Then you open the retirement fund. Then you use the credit cards. And when you’ve gone through everything you have, and done everything you can, you have no choice but to default on your loan. And so your home joins the nearly six million others in foreclosure or at risk of foreclosure across the country, including roughly 150,000 right here in Arizona.

But the foreclosures which are uprooting families and upending lives across America are only one part of this housing crisis. For while there are millions of families who face foreclosure, there are millions more who are in no danger of losing their homes, but who have still seen their dreams endangered. They are families who see “For Sale” signs lining the streets. Who see neighbors leave, and homes standing vacant, and lawns slowly turning brown. They see their own homes – their largest single assets – plummeting in value. One study in Chicago found that a foreclosed home reduces the price of nearby homes by as much as 9 percent. Home prices in cities across the country have fallen by more than 25 percent since 2006; in Phoenix, they’ve fallen by 43 percent.

Even if your neighborhood hasn’t been hit by foreclosures, you’re likely feeling the effects of the crisis in other ways. Companies in your community that depend on the housing market – construction companies and home furnishing stores, painters and landscapers – they’re cutting back and laying people off. The number of residential construction jobs has fallen by more than a quarter million since mid-2006. As businesses lose revenue and people lose income, the tax base shrinks, which means less money for schools and police and fire departments. And on top of this, the costs to a local government associated with a single foreclosure can be as high as $20,000.

The effects of this crisis have also reverberated across the financial markets. When the housing market collapsed, so did the availability of credit on which our economy depends. As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs.

In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen – a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit. And that’s what I want to talk about today.

The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.

At the same time, this plan must be viewed in a larger context. A lost home often begins with a lost job. Many businesses have laid off workers for a lack of revenue and available capital. Credit has become scarce as the markets have been overwhelmed by the collapse of securities backed by failing mortgages. In the end, the home mortgage crisis, the financial crisis, and this broader economic crisis are interconnected. We cannot successfully address any one of them without addressing them all.

Yesterday, in Denver, I signed into law the American Recovery and Reinvestment Act which will create or save three and a half million jobs over the next two years – including 70,000 in Arizona – doing the work America needs done. We will also work to stabilize, repair, and reform our financial system to get credit flowing again to families and businesses. And we will pursue the housing plan I am outlining today.

Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs.

But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. In short, this plan will not save every home.

But it will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

Here is how my plan works:

First, we will make it possible for an estimated four to five million currently ineligible homeowners who receive their mortgages through Fannie Mae or Freddie Mac to refinance their mortgages at lower rates.

Today, as a result of declining home values, millions of families are “underwater,” which means they owe more on their mortgages than their homes are worth. These families are unable to sell their homes, and unable to refinance them. So in the event of a job loss or another emergency, their options are limited.

Right now, Fannie Mae and Freddie Mac – the institutions that guarantee home loans for millions of middle class families – are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater – or close to being underwater – cannot turn to these lending institutions for help.

My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee. This will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.

I also want to point out that millions of other households could benefit from historically low interest rates if they refinance, though many don’t know that this opportunity is available to them – an opportunity that could save families hundreds of dollars each month. And the efforts we are taking to stabilize mortgage markets will help these borrowers to secure more affordable terms, too.

Second, we will create new incentives so that lenders work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.

Sub-prime loans – loans with high rates and complex terms that often conceal their costs – make up only 12 percent of all mortgages, but account for roughly half of all foreclosures.

Right now, when families with these mortgages seek to modify a loan to avoid this fate, they often find themselves navigating a maze of rules and regulations but rarely finding answers. Some sub-prime lenders are willing to renegotiate; many aren’t. Your ability to restructure your loan depends on where you live, the company that owns or manages your loan, or even the agent who happens to answer the phone on the day you call.

My plan establishes clear guidelines for the entire mortgage industry that will encourage lenders to modify mortgages on primary residences. Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines – which will be in place two weeks from today.

If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be. And under this plan, lenders who participate will be required to reduce those payments to no more than 31 percent of a borrower’s income. This will enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.

So this part of the plan will require both buyers and lenders to step up and do their part. Lenders will need to lower interest rates and share in the costs of reduced monthly payments in order to prevent another wave of foreclosures. Borrowers will be required to make payments on time in return for this opportunity to reduce those payments.

I also want to be clear that there will be a cost associated with this plan. But by making these investments in foreclosure-prevention today, we will save ourselves the costs of foreclosure tomorrow – costs borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole. Given the magnitude of these costs, it is a price well worth paying.

Third, we will take major steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages.

Today, most new home loans are backed by Fannie Mae and Freddie Mac, which guarantee loans and set standards to keep mortgage rates low and to keep mortgage financing available and predictable for middle class families. This function is profoundly important, especially now as we grapple with a crisis that would only worsen if we were to allow further disruptions in our mortgage markets.

Therefore, using the funds already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities so that there is stability and liquidity in the marketplace. Through its existing authority Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down.

We’re also going to work with Fannie and Freddie on other strategies to bolster the mortgage markets, like working with state housing finance agencies to increase their liquidity. And as we seek to ensure that these institutions continue to perform what is a vital function on behalf of middle class families, we also need to maintain transparency and strong oversight so that they do so in responsible and effective ways.

Fourth, we will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosure.

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That’s the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.

In addition, as part of the recovery plan I signed into law yesterday, we are going to award $2 billion in competitive grants to communities that are bringing together stakeholders and testing new and innovative ways to prevent foreclosures. Communities have shown a lot of initiative, taking responsibility for this crisis when many others have not. Supporting these neighborhood efforts is exactly what we should be doing.

Taken together, the provisions of this plan will help us end this crisis and preserve for millions of families their stake in the American Dream. But we must also acknowledge the limits of this plan.

Our housing crisis was born of eroding home values, but also of the erosion of our common values. It was brought about by big banks that traded in risky mortgages in return for profits that were literally too good to be true; by lenders who knowingly took advantage of homebuyers; by homebuyers who knowingly borrowed too much from lenders; by speculators who gambled on rising prices; and by leaders in our nation’s capital who failed to act amidst a deepening crisis.

So solving this crisis will require more than resources – it will require all of us to take responsibility. Government must take responsibility for setting rules of the road that are fair and fairly enforced. Banks and lenders must be held accountable for ending the practices that got us into this crisis in the first place. Individuals must take responsibility for their own actions. And all of us must learn to live within our means again.

These are the values that have defined this nation. These are values that have given substance to our faith in the American Dream. And these are the values that we must restore now at this defining moment.

It will not be easy. But if we move forward with purpose and resolve – with a deepened appreciation for how fundamental the American Dream is and how fragile it can be when we fail in our collective responsibilities – then I am confident we will overcome this crisis and once again secure that dream for ourselves and for generations to come.

Thank you, God Bless you, and God bless America.

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Introduction

Economic data released in the month of May confirmed that the housing market in Arizona has not hit bottom yet. Building starts and permits remain at record lows and average home prices attempt to stabilize amidst a fragile economic recovery and foreclosure market. Home prices in the Phoenix metro area as measured by the S&P/Case-Shiller Home Price Indices1, dropped for the 10th consecutive month in March 2011 reporting an 8.45 percent decline since a year ago. At the national level, residential home prices dropped to their lowest level since mid 2002 after experiencing a short-lived rise in home prices in 2009 and 2010 attributed to the housing market targeted stimulus.

In the last two years, the federal government has injected over $1 trillion into the economy through spending, tax-cuts, incentives and entitlements among other programs. The overall goal of the bills was to stimulate a job-based recovery by inducing consumer spending and promoting investment. The only stimulus directly aimed at the housing market was Federal Home Buyer Tax Credit.

Federal Home Buyer Tax Credit

In an effort to stimulate the housing market, Congress passed the Federal Home Buyer Tax Credit included in the Housing and Economic Recovery Act of 2008. The 2009 American Recovery and Reinvestment Act expanded the first-time homebuyer credit by increasing the credit amount from $7,500 to $8,000 for purchases made in 2009 before December 1 while the Worker, Homeownership, and Business Assistance Act of 2009 expanded the deadline from December 1, 2009 to May 1, 2010. The Home Buyer Tax Credit provided eligible individuals with a financial incentive to buy a home now instead of later. First time home buyers were eligible for a tax credit equal to 10 percent of the purchase price of a house, with a maximum credit of $8,000. Repeat home buyers were eligible for a similar 10 percent of the purchase price of a house, with a maximum credit of $6,500. Buyers qualified for the tax credits if a binding contract was signed between November 7, 2009 and April 30, 2010 with a closing date no later than September 30, 2010. One positive effect on the housing market that ended with the Federal Home Buyer Tax Credit on April 30, 2010 was the temporary increase in the demand for houses, both new and resale.

Coupled with the historically low home prices and mortgage rates, the Home Buyer Tax Credit gave sidelined home buyers the extra push they needed to purchase one of the biggest assets in their portfolio in an uncertain economic environment. The increased demand for homes was expected to reduce the inventory of distressed homes in the market and encourage a flattening of, if not an upward movement in, home prices. During the time the Tax Credit was in effect, average single family home prices in the Phoenix metro area bumped up 10.1 percent, from $179,000 in November 2009 to a new peak of $197,000 in January and later in May 2010 to coincide with the Home Buyer Tax Credit deadline extension. Average home prices (both single and multi-family) in the Tucson metro area remained flat (Exhibit 1).

Source: Arizona Regional Multiple Listing Service

The Arizona Regional Multiple Listing Service reported a 2.2 percent increase in home sales in the second quarter of 2010 compared to the same period in 2009 for the Arizona Region2 it covers.

The foreclosure market in Arizona showed some anomalies during this period as well. While it was expected that home inventories would decline, the exact opposite happened. In the three months between October 2009 and January 2010, over 7,000 houses were entered into the foreclosure process and this was not a typical Holiday effect. According to RealtyTrac Inc. which maintains one of the largest and most comprehensive databases of foreclosure and bank-owned properties with nation-wide coverage, foreclosure activities in Arizona spiked from 13,345 foreclosure filings in October 2009, the lowest since June 2008, to a new peak of 21,048 foreclosure filings in January 2010 (Exhibit 2). Total foreclosure filings include default notices, auction sale notices and bank repossessions.

Data Source: EBRC and RealtyTrac Inc.

It seemed as though houses had appeared from the shadows – a real possibility since a shadow inventory of bank-owned houses that have been pulled out of the market has been building up.

The short-term stimulus to the housing market had succeeded in raising home prices as well as bringing houses in the foreclosure process back into the formal market for clearing. There is fear however that the market may lose its momentum now that the homebuyer tax credit is expired, mortgage rates are rising and other economic stimulus programs are coming to an end.

Shadow Inventory

Shadow inventory is the inventory of homes that could enter the market in the near future and includes distressed properties of unlisted foreclosed homes, unlisted bank-repossessed homes, or any home whose principle borrowers are 90 days late on a mortgage payment.
According to a study3 by Selma Lewis, a Research Economist at the National Association of Realtors (NAR), the amount of shadow inventory in the United States through January 2010 was estimated at over 2.4 million homes. The estimates of shadow inventory uses the share of seriously delinquent homes (60+ days delinquent) that are already in the foreclosure process by the fourth quarter of 2009. These estimates are based on Lender Processing Services (LPS) roll rates4. It excludes from the inventory of delinquent homes; 24 percent of distressed homes in the foreclosure process that are already in the market, and 75 percent of delinquent loans under modification, and adds 75 percent of lender-owned properties (REOs) not on the market. Hence shadow inventory estimates by NAR differ significantly from shadow inventory estimates by other agencies that do not adjust for delinquent loan under modification, distress-home sales, ROEs among others. According to the study, Florida is reported to have the highest shadow inventory numbers at 441,461 homes, followed by California (227,961) and Illinois (121,226). These top three states account for 35.4 percent of total estimated shadow inventories in the U.S. while the top ten states accounted for a total of 62.2 percent.

Arizona fell right behind the top ten estimated states for shadow inventory, ranking in at 11th with a total of 60,286 shadow inventories estimated by the National Association of Realtors for 2010. Arizona accounted for 2.7 percent of total shadow inventories estimated for the U.S. Arizona reported a large amount of foreclosures in 2010, with 55 percent of all existing home sales in the state being distressed sales. Assuming only shadow inventory properties would be sold NAR estimates it would take Arizona nine months to completely clear the total amount of shadow inventories at today’s sales prices. While Arizona is ranked among the top five states for foreclosure processes by RealtyTrac Inc., and the top fifteen for shadow inventory by NAR, the state is doing relatively better in terms of getting rid of distressed properties. According to the NAR Study, Arizona’s shadow inventory seems to be moving relatively faster through the pipe lines and makes up a large share of existing sales (Exhibit 3).

Data Source: National Association of Realtors

The rate at which the shadow inventory clears is dependent on the number of borrowers who are becoming 90 days or more delinquent on their mortgage payments. Even though the economy appears to be in recovery, the delinquency rate remains high. The Federal Reserve5 reported a 10.23 percent delinquency rate for all real estate residential bank loans in the 1st quarter 2011. This was a decline from an all-time high of 11.34 percent reported in the 2nd quarter 2010. According to a study by Standard and Poor’s Ratings Services6estimates, the principle balance of the National shadow inventory – residential properties that are 90 days delinquent, are in the foreclosure process or are real estate owned but not yet on the market – stood at 433 billion in 1st quarter 2011, a drop from 450 billion dollars in the 4th quarter 2010. The amount of homes they estimate as shadow inventory, which does not account for delinquent loans that may not end up in the market, would take 52 months to sell at current home sales prices. The effects of the shadow inventory will be to depress home prices. When the large build-up of shadow inventory hits the market, the number of sellers will once again outweigh the number of buyers. Another concern is large amount of mortgages established during the peak of the home-sale bubble in 2006, which are scheduled to be reset in 2011. The fear is that the bottom has not been reached and there could possibly be worse times for the housing market ahead as the influx of shadow inventory floods an already saturated housing market.

Robo-signing Controversy

It is debatable how effective the tax credits were in the long-run since by September 2010 banks had succeeded in muddling up the housing market again. Word that banks, overwhelmed with paperwork, had been signing off on foreclosures without verifying the information on the documents led to bank-led and congressional investigations. As a result, several banks, including GMAC, Bank of America, Ally Financial and JP Morgan Chase, imposed a moratorium on foreclosure sales in October 2010. This led to a sharp decline in the number of foreclosure filings reported by RealtyTrac Inc. nationwide as well as in Arizona. As described by RealtyTrac inc., foreclosure activities in Arizona dropped from 16,538 in October 2010 to 10,384 foreclosure filings in November 2010 after the moratorium on foreclosures was imposed. This resulted in a drop in Arizona’s ranking by foreclosure rates from 3rd in October to 4th in November 2010; it’s lowest since November 2009. It is not exactly understood how the effects of the controversy continues to affect the non-judicial and judicial foreclosure process in Arizona, however as a whole, foreclosure activities are back on the rise as banks resume processing foreclosure sales. By December 2010 Arizona had returned to ranking the 2nd highest in foreclosure rates.

Arizona’s Foreclosure Market

According to RealtyTrac Inc. data, Arizona has steadily ranked 2nd in foreclosure rates over the last three months, after relinquishing the position in August last year. In February 2011, one in every 178 households was involved in the foreclosure process compared to the national average of one foreclosure for every 577 households. This meant that 15,485 households in Arizona received a foreclosure filing. However, this was a decrease of 1.7 percent since January and 7.4 percent compared to February of last year.

The foreclosure market is exceptionally large in Arizona with over half of homes sold in Arizona’s housing market being distressed homes. According to RealtyTrac Inc., Arizona recorded the second highest percentage of foreclosure sales in 2010. 55 percent of all residential sales in Arizona for 2010 were foreclosure sales, a decline from 54 percent in 2009. The share of foreclosure sales to residential sales for the fourth quarter 2010 were 55 percent, compared to 46 percent in the 4th quarter of 2009. According to James J. Saccacio7, the CEO of RealtyTrac Inc., fourth quarter and 2010 total foreclosures could have been higher if the foreclosure-documentation controversy and expiring home-tax credit had not slowed down the sale of foreclosed homes towards the end of the year.

While 2011 will continue to be plagued by the foreclosure crisis as the housing market tries to clear the shadow inventory of houses and employment hopefully kicks into gear, the general long-term trend indicates that foreclosures are on the decline. In 2010, the total number of foreclosure filings reported by RealtyTrac Inc. dropped by 4 percent compared to 2009. However, the level of foreclosure filings in Arizona still remained the third largest in the nation with Arizona registering 155,878 foreclosure filings in 2010 and ranked 2nd among all states in foreclosure rates for the second year in a row. The Phoenix-Mesa-Glendale Metro Area ranked 4th in foreclosure rates in 2010, with 124,720 foreclosure filings reported. The metro area also reported 55,372 bank repossessions in 2010, the largest number of bank repossessions (REOs) among all metro areas and 17 percent more than 2009. The Tucson metro area recorded a total of 14,480 foreclosure filings in 2010 and was ranked 38 in 2010 by foreclosure rates by RealtyTrac Inc., up from 41 in 2009.RealtyTrac Inc. tracks 206 metro areas in the nation.

Arizona’s high ranking in foreclosure rates implies that the state’s housing market is still in critical condition. Arizona continues to be second only to Nevada for foreclosure filings, which has topped the nation in foreclosures for 50 months. Arizona’s housing market was among the first in the nation to crash and continues to be deeply affected by its aftershock. Therefore, it will probably take Arizona’s housing market longer than the national average to recover.

Footnotes:

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In Bank of New York Mellon v. De Meo, the Arizona Court of Appeals held that the Protecting Tenants at Foreclosure Act (PTFA) requires a tenant to receive an unambiguous 90-day written notice before any eviction proceeding may be commenced. In this case, Mellon Bank foreclosed on the home Patricia De Meo occupied under a rent-to-own lease agreement, which had converted into a month-to-month tenancy. Mellon Bank gave only a five-day notice, addressed to the former owner and all other occupants, but filed the eviction action 97 days later. It argued in the trial court that it satisfied the PTFA by waiting more than 90 days before filing the eviction. The trial court apparently agreed with the bank and granted the bank possession. The tenant’s appeal followed.

In a unanimous published decision, the Court of Appeals reversed. The court first rejected the bank’s position that the PTFA may be satisfied by serving a short notice, as long as 90 days had elapsed before an eviction is filed. The court held that the PTFA, by its express terms, “requires that a successor property owner provide a bona fide month-to-month tenant with a 90-day notice to vacate before terminating the tenancy, and the 90-day period must be completed before the notice’s effective date.” “Obviously, a five-day notice, even when followed by an unannounced 90-day delay, is at best misleading,” the court explained.

The court then proceeded to reject bank’s argument that the PTFA notice may be oral, holding that “such an interpretation would be contrary to the express language of the law.”

Much of the opinion tracked arguments raised in the amicus briefs filed by a coalition of legal services organizations and law professors in support of Ms. De Meo, who represented herself pro se. Briefs for amici, led by the National Housing Law Project and represented by Jeffrey Kastner at Community Legal Services, can be found at http://nhlp.org/node/1265.

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