Canaries in the Coal Mine: Casework Lessons from the 2008 Crisis
Note about the author: Katherine Long, POPVOX Senior Fellow for Casework Programs, served as a housing/IRS caseworker and casework manager for recently retired Senator Patrick Leahy (VT).
Over the past several years, caseworkers and Congressional offices have been through crisis after crisis, responding capably and creatively as each new issue arises. New and experienced casework teams consistently bring up questions about handling the non-stop pace beginning in March of 2020 with the repatriation of American citizens at the start of the pandemic, and continuing through stimulus payments, pandemic relief, the Afghanistan withdrawal, and the current passport backlog crisis (and lots in between).
As former Congressional staffers, we know it can be difficult for teams to carve out time to reflect on past work and think proactively while trying to catch up from years of high volume. And we are also aware of how the high turnover rate for many Congressional staff and turnover of Members can make it tough to maintain institutional knowledge or memory.
However, being able to tap into long-term casework experience can help teams prepare for the types of casework that come up when history repeats itself.
In recent months, inflation, rising interest rates, and high housing costs are squeezing constituents around the country. For those of us who were around in 2008, there are some familiar themes in the headlines: bank failures, Main Street vs. Wall Street, layoffs, “bailouts.” Are we approaching another financial crisis? Hopefully not. However, caseworkers have access to some early warning signals—the proverbial “canaries in the coalmine”—that will begin to reflect larger shifts in policy and demand for federal support, and associated demands on Congressional caseworkers.
In this retrospective, we dive into the experience of the 2008 financial crisis from a caseworker’s perspective, and consider what lessons might apply today and in the future.
A Rising Tide
In Vermont, early signs of financial turmoil came in 2007, at the start of the crisis, when home prices were still high but interest rates had dropped.
Until that time, mortgage casework was relatively rare, and typically only involved federal loans through USDA-Rural Development (USDA-RD, the Department of Veterans Affairs (VA) and Federal Housing Administration (FHA). Of the three, only USDA-RD DIRECT loans are made directly by the federal government, and ethical considerations precluded the involvement of Congressional offices in bank transactions such as mortgages. Constituents who called about these mortgages were typically gently referred back to the bank, to the bank regulator, or to legal services.
But in 2007 and early 2008, some homeowners with USDA, VA, or FHA loans who had benefited from subsidized interest rates, low or no down payment, and favorable underwriting suddenly found themselves underwater on their home’s value, behind in payments, or stuck paying higher interest rates than what the private market offered. Homeowners who wanted to restructure the loans to a lower rate often found they were unable to do so for statutory or regulatory reasons. As the crisis escalated, the volume of inquiries to the loan processing centers made it more difficult to get timely payout information if homeowners made the difficult decision to sell. In these situations, it could make sense to make inquiries to the USDA, VA, or the FHA regarding program rules or payout calculations, but these loans comprised a small percentage of home mortgages even in our small rural state.
By 2008, however, the economy had melted down and people everywhere were losing jobs. Around the country, millions of homeowners were in trouble: locked into unsustainable mortgages exceeding the value of their homes, facing adjustable rates that were spiking and second mortgages with balloon payments coming due. Many had literally banked on the increasing value of their homes, cashing out for home renovations or to cover medical costs or job loss.
Vermont was relatively insulated from the worst of the mortgage crisis: the state has a strong network of responsible local banks and credit unions, and the bad actors in the mortgage industry had mostly stayed away from rural areas. Vermont also has a unique model of shared equity homeownership that offered responsible options for those with limited access to traditional lending, and the local housing counseling agencies affiliated with the national Neighborworks Network offered housing counseling for homeowners struggling to make their mortgage payments.
But still, food and fuel costs were up, and jobs were down. Those who had been marginally employed were the first to be pushed out of the job market: SSI and VA disability claims went up, and so did agency backlogs. An unemployed homeowner waiting for help was faced with impossible choices: rack up credit card debt paying for essentials, or making the mortgage payments? Declare bankruptcy, or try to preserve their credit for a future loan?
As homeowners with commercial mortgages fell behind on their payments, casework teams in Congressional offices started hearing a variety of complaints:
Lenders (banks or servicers) refused to accept partial payments or late payments, which homeowners felt was intentionally pushing them into foreclosure.
Homeowners who called their lenders for help were advised not to make payments, essentially to go into default with a promise that they might be able to restructure their loans.
Scammers and bad actors advertised help on TV and elsewhere, taking upfront payments to solve the problems, then making off with the money, and leaving the homeowner further behind.
Exacerbating the financial problems, homeowners were also struggling to buy fuel oil for heating through the cold Northeastern winters.
The safety net was straining to keep up: claims for SSDI and VA disability continued to increase, pushing up backlogs and wait times.
Many nonprofit safety net organizations struggled to fundraise and some went under as the stock market decline affected large donors and endowments as well their individual fundraising efforts.
Policy Solutions Created More (Casework) Problems
To stem the tide of foreclosure, national banks and Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac instituted some voluntary programs to help individual homeowners. In 2009, Congress also enacted several mortgage relief programs under the Making Home Affordable (MHA) Program including HAMP (Home Affordable Modification Program) and HARP (Home Affordability Refinance Program). These programs required servicers of federally backed mortgages, including those owned by Fannie Mae or Freddie Mac, as well as VA and USDA loans, to consider alternatives to foreclosure for homeowners struggling to make their payments. Servicers were given a federal payment incentive to restructure mortgages according to formulas that could extend the term, reduce the interest rate, or forgive part of the principal of the loan in order to achieve a sustainable mortgage payment amount.
Crucially, this legislation called for the the applications for these foreclosure alternatives to be handled by the lenders and mortgage servicers, which were ill-equipped to manage the flood of applications. Homeowners grabbed the lifeline they were offered by the federal programs and held on, faxing thousands of pages to the servicers, often receiving confusing communications and broken promises in return.
Predictably, with the understanding that these were federal programs, desperate homeowners reached out to Congressional offices, including in Vermont.
As caseworkers do, our office tried to identify the federal nexus and pathways for resolution. I recall starting with one of the many bank regulators, the Treasury’s Office of the Comptroller of the Currency, where at one point, we found a helpful person who prevented the forcible weekend eviction of a disabled veteran. To help navigate the confusing landscape of financial regulation, we used and referred constituents to “Help with my bank,” which had a handy tool to identify which entity, state or federal, regulated the lender. But the bank regulators were not equipped to handle mortgage restructuring, and ultimately, these inquiries mostly resulted in pro-forma responses and little help for the homeowner.
Once the various mortgage relief programs rolled out, Congressional offices were able to offer some guidance from Fannie Mae and Freddie Mac. The first step was to identify whether Fannie Mae or Freddie Mac owned the mortgage, not an easy task despite the reams of paperwork most homeowners had compiled as they attempted to navigate the loan modification process. In some cases, the mortgages had been re-sold so many times that it was also difficult to determine which company was the servicer of the loan.
Despite the Federal nexus to these cases, they were unlike typical federal programs that are administered by executive branch personnel. As a result, Congressional offices had few effective avenues for resolving problems: Fannie Mae and Freddie Mac established email addresses for Congressional inquiries about loan modifications, but the law did not give them any enforcement mechanism to review the details of an individual loan modification, and frequently their responses would parrot back the response the bank had provided to the homeowner. A generic “HAMP Resolutions” email address similarly generated some additional correspondence and may have helped in a few cases; however, more often, the involvement of an attorney was required to ensure that the servicer was properly applying the federal program regulations in considering an application.
Ultimately, in Vermont, two state-level efforts were stood up in an effort to help struggling homeowners:
The Vermont Department of Banking created a Mortgage Assistance Program and assigned a caseworker to advocate with mortgage servicers on behalf of individual homeowners. Although that office had no regulatory authority over the national banks, it had established relationships and points-of-contact with most of them. The program could also help homeowners interpret the program rules and navigate the endless paperwork.
With the encouragement of Vermont Legal Aid’s Poverty Law Project, Vermont enacted its own mandatory mediation law tied to the federal program and required the courts handling foreclosures to offer mandatory mediation to any homeowner who should have been eligible for the federal relief programs. This creative state-side solution made more of a difference than other strictly federal avenues to enforce the Congressional intent of the mortgage relief programs.
As the crisis went on, referring constituents to attorneys and to these state-level initiatives, along with foreclosure prevention counseling offered by the national Neighborworks Homeownership Counseling Centers and HUD-certified housing counseling agencies, became the standard protocol for mortgage cases.
At some point along the way, seemingly out of the blue, some of the large national banks sent Congressional offices official contacts to use in resolving individual constituent cases. However, using these contacts was not a straightforward decision: my Senate office had a longstanding policy (shared almost universally among Congressional offices) that casework involved matters pending before federal agencies: Members of Congress should not exert, or be perceived to exert, pressure on private companies on behalf of constituents. Our team’s instinct was that this was a largely PR-focused move, intended to divert Congressional attention from systemic failures and their large-scale inability or unwillingness to comply with the federal relief programs.
Would contacting banks or mortgage servicers be sidestepping our longstanding policy and open the door to constituents seeking redress from other private businesses? Bigger picture, would resolving the individual cases directly with the servicers reduce the pressure for Congress to conduct oversight on existing laws or enact new regulatory frameworks? Or would it simply reflect the increasingly complex relationship between private entities and the federal government and serve constituents who are desperately seeking a “no wrong door” approach to bureaucracy?
In our office, after consultation with the Chief of Staff, we agreed to use the private bank and servicer contacts sparingly based on a criteria of urgency and after exhausting other avenues. I can’t recall using that avenue more than a couple of times, but it marked a bit of a sea change for us on what had traditionally been a bright line for casework.
A Long Policy Shadow
Over time, as more federal and state relief measures were implemented and the economy overall improved, some struggling homeowners were successful in modifying their loans into a more sustainable payment, or they found jobs and were able to make the higher payments.
For others, the effects of the crisis continued to surface over time. It became a sad casework truism that it takes about five years for someone’s life to fall completely apart. Years after I closed cases, I would browse the court notices in the local paper and choke up a bit when I would see a familiar name in the foreclosure section. On occasion, we heard from a homeowner who had successfully modified their loan, only to fall behind again due to further job loss, illness, or accident.
In addition to mortgage modification programs, constituents experienced a number of other cascading issues with more or less federal nexus:
Homeowners tried to sell their homes under short-sale programs but the overwhelmed servicers and/or federal mortgage owners did not respond timely, so the buyers moved on.
Homeowners who were granted loan forgiveness through a modification or lender-approved short sale were surprised to learn that they owed taxes on the amount of the relief.
Potential buyers (and their realtors) complained that they were ineligible for mortgages after Fannie/Freddie tightened their underwriting standards in response to the crisis.
Purchasers (and their realtors) hoping to buy foreclosed homes had difficulty contacting the servicers or federal backers of the loans, resulting in loss of sales and abandoned homes.
Credit issues related to the long period of default plagued homeowners including those in need of security clearance or clean credit for employment.
Lessons Learned
Certainly economists and housing experts can speak to whether the mortgage relief programs created to address the crisis of 2008 were efficient at the macro scale or reached their desired policy outcome. And Congressional offices can measure the number of cases resolved favorably and those with unfavorable outcomes.
But I would argue that, as important as the outcome of individual cases were the feelings expressed by the homeowners and by other constituents in financial distress. Loud and clear, they expressed that Wall Street was bailed out, and the people on Main Street were not. When they grabbed the federal lifeline, it turned out to be a fax line to a mortgage servicer. And they were met at their darkest moment with frustration and confusion, not a fair and efficient process that demonstrated the federal government’s willingness to help them.
From a casework perspective, unlike many federal programs operated by federal agencies, the federal mortgage relief programs were implemented by private entities without an avenue for oversight or redress or some type of ombudsman who could have ensured that homeowners were properly treated under the law. We can see similar issues with some of the Coronavirus relief programs which rely heavily on private banks to administer SBA business loans, the Internal Revenue Service (IRS) using private companies to distribute stimulus payments on debit cards, private student loan servicers, and even Medicare Advantage plans.
As caseworkers, we know that constituents rarely care whether the person processing their application is a federal employee. But their experience with the program or agency reflects entirely on the federal government. Ensuring that we have effective and appropriate avenues for Congressional caseworkers to help constituents resolve problems and redress grievances in every federally funded program could go a long way toward renewing constituent faith in the federal government.
Some resources to help casework teams prepare for mortgage-related casework:
Federal Housing Finance Agency (FHFA) Assistance with Mortgages
Financial Regulators: Help with my bank
HUD/DOJ Emerging Strategies for Effective Foreclosure Mediation Programs
CFPB: Who owns my mortgage?