Cities can use local housing codes and land banks to push back against banks' reckless behavior.

Since the beginning of the economic downturn, Congress has passed numerous pieces of legislation aimed at stabilizing the housing market. Their legislative efforts succeeded in stabilizing financial markets, but foreclosures have continued unabated, affecting families and neighborhoods across the country. While the foreclosure crisis continues to be a drag on the economy, its effects are felt most acutely in communities and neighborhoods.

For the last decade or so, growth in America's housing stock was driven primarily by investment rather than demand. As a result, there is a surplus in the housing market, which causes many foreclosed homes to sit vacant for years, generating no revenue for their (often institutional) owners who have no intention of occupying the property themselves. Rather, the institutional owners must either pay to maintain the property or let it fall into disrepair. In the many cities where this is the case, it is economically rational for the lender to modify the mortgage, if possible, and allow the current occupants to remain in their home. There are two benefits to such an arrangement: (1) the lender will not be responsible for maintaining the property, and (2) the property will continue to generate revenue for the lender in the form of mortgage payments.

In refusing to modify mortgages, lenders are often acting irrationally. Despite many attempts, the federal government has failed to pass legislation that would force or sufficiently incentivize lenders to modify mortgage principals on a large scale. As a result, foreclosures continue and local governments are left to bear a disproportionate share of the burden. The harms of abandoned property are well-documented: nearby property values decrease, property tax revenues decrease, the community's safety and health are often put at risk, and a negative perception keeps out new investment.

Not all localities, however, are letting these institutional lenders harm their neighborhoods without a fight. Increasingly, they are holding absentee and institutional lenders accountable for the mess their mindless foreclosures create within their jurisdiction. The most successful approaches have included two components: strong code enforcement and a land bank. Land banks are local, usually governmental, entities that can acquire, hold, and dispose of properties according to community needs and priorities. The best way to explain the process is to walk through the steps.

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The mortgagee, often a bank, forecloses a mortgage that the homeowner is no longer paying. The bank may not be able to resell the property, so it sits vacant. This is happening all across the country. The New York Times reported that there were 15,000 abandoned properties in Chicago back in October 2011, most of which resulted from foreclosures. Ideally, the property would not be sitting vacant at all, but the problem of vacancy is compounded when institutional owners fail to manage the property. Most institutional owners, often the big banks, are not well-equipped to maintain properties at the standard required by local housing codes. As a result, it often falls on the local government to board up broken windows and mow overgrown grass.

Here, code enforcement comes into play (which is sometimes supplemented by a vacant property registration system). The owners can be fined when the property does not meet code. The fine must be sufficiently large to give the absent owners an incentive to either maintain or sell the property. If the institutional owner does not pay the fine, it can be placed against the property as a lien. Eventually, non-payment allows the city to foreclose the lien and take the property into its inventory, ideally transferring it to a land bank with expertise in land management to assist in long-term community development.

Alternatively, the banks may choose to donate unoccupied properties in their inventories as a way to avoid paying the steep fines. The case study of Cleveland has been widely publicized in the New York Times and 60 Minutes, among other media outlets. The banks that own dilapidated property in Cleveland, including Bank of America, J.P. Morgan Chase, and Wells Fargo, are so tired of paying fines that they are actually donating them to the local land bank and sometimes paying it up to $7,500 to demolish formerly-occupied properties! The inefficiency of this option for banks is startling and, if banks get their act together, will result in more modifications in lieu of foreclosures.

Cities facing high rates of foreclosure and high rates of property abandonment would be well-advised to adopt this model. Doing so on a widespread basis will have one of two positive effects: either the institutional owner will maintain the property in a way that lessens the harm to the community or the locality will be able to impose large fines and eventually take control of the abandoned property. Without a successful national program to decrease foreclosures, this is the most powerful option local governments can adopt to minimize the effects of the foreclosure crisis.

Kristen Tullos is a Roosevelt Institute Pipeline | Fellow and a third-year student at Emory Law School in Atlanta .

The Federal Reserve sent a warning shot that housing is the greatest threat to the economy. The government should take note.

As we start the New Year, the executive branch and Congress continue to pretend the gravest risk to our economy and social stability does not exist: the ongoing foreclosure crisis. The financial crisis began with the housing crisis and it will not end until we resolve housing. Government policymakers who seemingly ignore this basic fact are leading the nation to another potential catastrophe.

This past week, a number of important events occurred in Washington, including important recess appointments by President Obama. However, the most noteworthy event did not make front page news: the Federal Reserve's (apparently) unsolicited memo to the committees of Congress that oversee financial services warning of the dangers the current housing market poses for the economy.

This represents an extraordinary action and underscores both the seriousness of the continuing crisis and the absence of meaningful discussion of the problem in Washington. Bernanke's memo reviewed federal actions to date and effectively concluded that they were unlikely to solve this national tragedy. The memo concluded, in part:

The challenges faced by the U.S. housing market today reflect, in part...a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally)... Absent any policies to help bridge this gap, the adjustment process will take longer...pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

This memo is notable for several reasons. First, it's important to remember that when the Fed speaks, it does so in sober, limited terms. So an unprompted Fed warning suggesting "a persistent excess of supply" and a "resultant drag on the economy" is comparable to the Secretary of Homeland Security holding a press conference to warn of the risk of an imminent national emergency. Second, an unprompted memo from Bernanke to the House means that he is so deeply worried he felt the need to speak out in as strong a voice as his position permits. Third, the Fed rarely speaks on issues unrelated to its direct activities. Indeed, The Wall Street Journal subsequently wrote, "For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters."

Finally, co-ordinated speeches by three top Fed officials further indicate the depth of the Fed's concerns. On Friday, the presidents of the New York and Boston Fed banks and Betsy Duke, a Fed Governor, all gave speeches detailing the need for aggressive action to spur a housing recovery. For example, William Dudley, President of the New York Fed, told a group, "The ongoing weakness in housing has made it more difficult to achieve a vigorous economic recovery."

There are a multitude of other indicators that our current treatment of the housing sector will at minimum prevent an economic recovery and at worst have disastrous consequences for the stability of the financial sector as well as the health of the middle class. (For the record, my analysis leans toward the latter of these two viewpoints.) These include the reportedly poor health of our financial institutions (zombie banks), the administration's seeming efforts to cover this fact up, and the inevitable failure of federal homeowner assistance programs that rely on the cooperation of financial institutions whose profit incentives are in the reverse direction.

Consumer spending represents 70 percent of the nation's economy and is central to any economic recovery. To achieve sufficient aggregate demand (i.e. total spending on goods and services), this will require spending by middle-income individuals in addition to what we now call the 1%. The Fed report suggests that the housing crisis makes such a recovery unlikely.

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The report found that, in the aggregate, more than $7 trillion in home equity -- more than half of the aggregate home equity that existed in early 2006 -- has now been lost, noting, "This substantial blow to household wealth has significantly weakened household spending and consumer confidence." Moreover, "Middle-income households, as a group, have been particularly hard hit hit because home equity is a larger share of their wealth in the aggregate than it is for low-income households (who are less likely to be homeowners) or upper-income households (who own other forms of wealth such as financial assets and businesses)." These households have seen their home equity decline by an estimated 66 percent.

Moreover, the fear of a continuing loss of wealth (which is a cushion against job loss or other economic emergencies), the fear of job loss itself, the negative effects of underwater homes, lack of forbearance for unemployment (a point the Fed particularly emphasizes), and consumers struggling to meet mortgage payments in a far more difficult environment are all dragging the economy down.

There is also a far worse possibility. Today, an estimated 29 percent of all homes with mortgages are underwater. In addition, at least one respected analyst estimates that a total of 14 million homes will be foreclosed on from 2007 to the end of the crisis. This represents a hard-to-imagine one in every four mortgages. With foreclosures increasing, there is now such a looming imbalance of supply and demand that, as the Fed notes, further decreases in home prices are likely. Some believe home price reductions of another 20 percent are likely. This would, in all likelihood, have disastrous consequences on at least three fronts -- and ripple effects that are impossible to predict.

First, so many homeowners would be so far underwater that massive walkaways would be likely. The negative impact on consumer spending of such price declines would almost certainly lead to a vicious cycle of more job losses, leading to further walkaways by struggling consumers.

Second, the mortgage securities market would be in chaos. Nonperforming loans would lead to the forced recognition that bank capital (based on the value of mortgages in bank portfolios) is weak or insufficient.

Third, it is almost impossible to imagine foreclosures on the massive scale anticipated without dire social consequences or even some form of social unrest. As Peggy Noonan has observed, the real meaning of Occupy Wall Street is that this is just the beginning of the protests we are likely to see. "OWS is an expression of American discontent, and others will follow," she predicts. Protests and social unrest are particularly likely if people feel they are unfairly losing their homes to support irresponsible, law-breaking institutions that have successfully disregarded the fundamental rules of capitalism and good citizenship. Mechanisms to avoid this possibility are one of the central issues I address in my forthcoming book, Making Capitalism Work for the 99%: A Manifesto.

What is shocking is the almost total lack of attention the administration has paid to suffering homeowners. It's hard for me (and apparently Chairman Bernanke) to understand how the administration can possibly hope to revitalize the economy without seriously addressing the overhang of consumer housing debt. Moreover, the failure to address the risk this poses for a broader economic catastrophe borders on the inexcusable.

If President Obama is serious about saving the middle class and reducing income inequality, the administration needs to be far more aggressive in developing policies to keep homeowners as homeowners. As I have written before, this was one of FDR's central goals in the New Deal. Detailed proposals for addressing this extraordinary risk do exist. However, they will require a determined effort. There are solutions, but they are not simple.

What is most important right now is that we recognize we are in a lifeboat that will not reach land. We need to focus on implementing a meaningful solution to the problem. A clock is ticking and Washington needs to acknowledge that a witching hour is approaching.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

They oversee 80 percent of consumer spending. While they suffer, the economy suffers.

The New York Times reported earlier this week that consumer spending, while slightly up for the holidays, wasn't as strong as many were hoping and ended up looking pretty depressed in 2011. Consumers' unwillingness to open up their pocketbooks and go on credit-fueled shopping sprees portends dismal economic growth in the near future. They have already cut back so far that there is "little room for a big increase in spending in 2012," as the article puts it. And it reports, "Consumer spending makes up 70 percent of the economy, so until it ignites, general growth is likely to be sluggish."

It's no mistake that both the people interviewed for the article were women. There's Sarah M. Manley from Minnesota, who has frozen crab legs she bought on discount stowed away for Valentine's Day and now buys milk in plastic bags from the gas station instead of in cartons. There's also Lynette Paudel of Ohio, who plans to drive her 2003 minivan until it breaks but was lucky enough to avoid being let go from her high school English teaching job. When it comes to talk of consumer spending, we might as well be talking almost exclusively about women. They oversee 80 percent of consumer spending, totaling $3.7 trillion. As long as they continue to suffer in the recession, the rest of the economy will sputter along.

Paudel is very lucky to have kept her teaching job. Since the recovery officially began in 2009, women have actually been losing jobs. They saw 46,000 disappear, while at the same time men made some gains, getting back 1.26 million. Women's unemployment rate has also inched up while men saw a decline. And a large part of that trend is that women were big losers in public sector layoffs, losing 374,000 jobs. A lot of those came from public education jobs -- elementary and high school teachers like Paudel.

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That's not the whole story, however. Men have also been making gains in the public sector while women lost, driven by huge job losses for administrative and secretarial positions. Men are even gaining in the traditionally female-dominated retail industry.

Even those women who are still employed are likely struggling with other factors. Housing debt is a huge barrier holding consumers back. The Times article reports, "with more than one in every five borrowers still owing more than their homes are worth, many homeowners feel too pressed to spend on much more than the essentials." But as the Consumer Federation of America found, women were 32 percent more likely to receive subprime mortgages than men across all product lines, even though they have similar credit profiles. Those high-cost loans, often pawned off on those who could least afford them, have led to a massive wave of foreclosures and put many homeowners underwater. And overall, women's representation in the mortgage market has grown in recent decades -- the number of single women homeowners, for example, grew by 4 million between 1994 and 2002. They're likely to be struggling under heavy mortgage debt loads.

They also, of course, make less than their male counterparts for similar work. So while American workers' wages have stagnated over the past three decades, women have yet to even catch up to men.

It's likely that some of the women overseeing that 80 percent of consumer spending aren't going it alone. Many are making decisions for their families' spending, and if they are unemployed hopefully they can rely on income from an employed spouse. (Although in a recent poll almost a quarter of respondents had a family member who had experienced job loss.) But if consumer spending is going to continue driving the economy, and the economic recovery, what's happening to women in the recovery period can't be ignored. Things have been bad and show no sign of looking up.

Bryce Covert is Editor of New Deal 2.0.

Want a way to pay for free higher education? Take a look at all the tax breaks that ease the burden of student debt.

Josh Eidelson has a great post at The Nation, "Fighting Privatization, Occupy Activists at CUNY and UC Kick Into High Gear," that dives into the battles currently being waged against the dismantling of public higher education. One of the Occupy movement's major objectives is combating the privatization of public higher education and its replacement with a debt-fueled economy of indenture.

While prepping a recent Occupy panel, Sarah Jaffe brought up how we subsidize student debt in a similar way to mortgage debt, that is, through allowing people to deduce the interest paid on this debt from taxes. According to Pew Charitable Trust's website subsidyscope, the deductibility of student loan interest alone costs taxpayers $1.4 billion dollars. Instead of taking $1.4 billion dollars and directly making college cheaper, students take out massive amounts of student loan debt and we alter the tax code to make that debt $1.4 billion dollars cheaper.

This is an example of what Suzanne Mettler calls "the submerged state," a pattern where the government has, as she says, "shunned the outright disbursing of benefits to individuals and families and favored instead less visible and more indirect incentives and subsidies, from tax breaks to payments for services to private companies. These submerged policies...obscure the role of government and exaggerate that of the market." Instead of directly providing public options, we subsidize the purchasing of private goods, often using the tax code.

Let's take the case of student debt and the tax code. How much would it cost to make public colleges and universities free? Rough estimates (quoting Jeffrey Sach's latest book) put the price of free public higher education at $15-$30 billion, which fits other estimates I've seen.

Now what are the costs of how we subsidize higher education through the tax code? There's already the $1.4 from the interest exemption. Also from subsidyscope, there's the exclusion of employer-provided educational assistance ($1.1 billion), exclusion of interest on student-loan bonds ($0.6 billion), exclusion of scholarship and fellowship income ($3.0 billion), exclusion of tax on earnings of qualified tuition programs: savings account programs ($0.6 billion), the HOPE tax credit ($5.4 billion), the Lifetime Learning tax credit ($5.5 billion), parental personal exemption for students age 19 or over ($3.4 billion), and state prepaid tuition plans ($1.75 billion). There's also the stimulus's American Opportunity Tax Credit ($14.4 billion) and some part of the deductibility of charitable contributions (education) ($4.9 billion).

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Even without the last two, that's $22.75 billion we are paying through the tax code to make college tuition and student debt more manageable. This amount is in the middle the range of the cost of just making public high education free. Now these aren't equivalent -- much of what is spent through the tax code will be biased more towards private and professional schools, which are more expensive. But this also isn't anywhere near the full extent we subsidize student debt (a government creation from 1965).

But there is a choice in how to provide mass higher education. We can either use resources to reduce the price of the good upfront -- make college free -- or to subsidize the purchase of the good -- here through the numerous hoops of the tax code. The amount of money we take from the tax code to try and make student debts and runaway tuition more bearable could be used instead to just provide free public colleges.

There are winners and losers in each case. When we subsidize through the tax code, people who are well off and pay more taxes benefit more. People who can afford support staff, such as accountants and lawyers, are also more likely to understand how to take maximum advantage of these benefits. These subsidies benefit private educational institutions over public ones, as they'll make private education feel more "natural" while obscuring the role of the government in setting up these markets. They give public college a nudge towards corporatization and privatization. Much of these subsidies are likely captured either by the higher education institutions themselves or the debt lenders. These subsidies will make tuition and debt easier to deal with, but providing colleges free as a public option would likely do far more to contain costs (also see here).

Most importantly, it breaks the link between citizenship and education. The subsidy approach replaces the claim to a necessary good to be full, participating citizens in our market economy with the claim of a consumer, whose claim is ultimately one of willingness to pay either through wealth or debt. The first kind is the place where progressives have the stronger argument about freedom, as opposed to those who see the market as the only source of freedom available.

Mike Konczal is a Fellow at the Roosevelt Institute.