Innovation needed now to combat foreclosure crisis

Joseph R. Paolino Jr.

11/13/2010

As the news of the recent election fades from the headlines, now is the time to focus on how our public leaders can work together effectively, and with the private sector, to address critical problems facing Rhode Island residents.
As a former mayor of Providence, and one-time director of the R.I. Economic Development Corporation, an issue that immediately comes to mind is one that’s placing a severe drain on cities and towns across the state: the foreclosure crisis.
Nationwide, policy efforts to stem the tide of foreclosures have stalled, while rates of those falling behind on mortgage payments and losing their homes continue to rise. Existing federal loan-modification programs have barely made a dent in this problem. A recent New York Times article shows such programs have little impact on the whopping 4.2 million loans in foreclosure nationwide. Despite the federal government’s attempt to intervene, many Americans continue to struggle to make monthly mortgage payments they simply cannot afford.
I write not as a policymaker but as a businessperson, one who believes logic dictates that we must take a common sense approach to addressing this problem by partnering existing resources with new ideas. With the third-highest foreclosure rate in New England, many Rhode Island homeowners are in desperate need of a statewide foreclosure-mitigation program that works, one that will allow them to modify the terms of their loans, lower their monthly payments and allow them to stay in their homes. Local programs are effective, as demonstrated by the success of the U.S. Bankruptcy Court, District of Rhode Island’s loss-mitigation program. But such initiatives need to be expanded and supported in order to reach the maximum number of Rhode Island residents, to end the foreclosure crisis and to reinvigorate the state’s economy.
We need to develop a program that takes a financial lemon and makes it into financial lemonade, giving proper financing to homeowners who are in upside down loans so they can restore the value of their investments. Working with the new wave of elected officials, banks and Rhode Island Housing, a program should be designed to reset existing loans with lower interest rates and longer payment terms, creating affordable payments for homeowners, while protecting investments for banks. Take, for example, a homeowner who holds a 10-year, $200,000 mortgage with a 7 percent interest rate. His or her monthly payment is about $2,300, leaving him or her on the brink of foreclosure because the payment is simply too high. By refinancing the property at 5 percent, and extending the life of the loan to 30 years, this homeowner can see a substantial drop in the monthly mortgage payment, to just under $1,100 a month. This scenario gives the homeowner an affordable monthly payment, while protecting the bank’s initial investment. Such a program requires no extra dollars from the state or federal government, only a willingness by banks to work with policymakers to make this happen. In the end, it becomes a win-win situation that is good for the state’s residents, and good for the state’s economy.
Such a program could be administered by Rhode Island Housing, a well-regarded state agency with the potential to expand existing programs to help Rhode Island residents in record numbers. Additionally, I believe that it’s time for Providence to have its own housing corporation. When I was mayor 25 years ago, the legislature overwhelmingly approved such an agency, only to have it vetoed by the governor at the time. Providence is the epicenter of the housing crisis in the state, and an agency exclusive to the capital city could be an incubator for innovative housing policy.
With every crisis comes an opportunity. Across the state, Rhode Islanders have recently elected change agents who are very capable of implementing effective new policy. Providence Mayor-elect Angel Tavares is well-schooled in social enterprise, and with his can-do attitude and creative approach to problem-solving, can bring a fresh perspective on how to address this enduring problem. While I supported another candidate for governor, I have confidence in Gov.-elect Lincoln Chafee to work diligently on this issue. He has been a mayor and a U.S. senator, and has seen the magnitude of this problem on a local and national level. Additionally, he has stated a refreshing willingness to work with the General Assembly to enact policies that will move the state’s economy forward, and has mentioned on numerous occasions that he is open to new ideas.
Because interest rates are now at historic lows, we have a short window to harness the energy, intelligence and good will among our elected officials to collaborate with institutions to mitigate this problem, by refinancing existing loans and lowering monthly payments – a practical and long-term solution to the foreclosure problem.
Rhode Island has an opportunity to emerge as a national model that takes advantage of existing resources and applies them creatively in the face of adversity. Businessmen renegotiate the terms of their loans all the time, and in order to keep the state’s economy afloat, we need to be sure that homeowners are afforded that same opportunity. But the time to act is now.
Those in state government need to take a leadership role, forging a partnership with banks and institutions that will create a swift and effective response to this problem, which could become a nationwide model. The rest of the country could have a lot to learn from us. •

Joseph R. Paolino Jr. is a downtown property owner, former mayor of Providence and once served as economic-development director for the state.

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