Jeff Gelles: 2 named to U.S. consumer panel

Vast numbers of Philadelphians suffered from the housing bubble, the financial collapse, and the Great Recession, and many still suffer from what is plainly the worst economic slump since the Great Depression.

But by some measures, Philadelphia has done better than many other places - though "less awfully" might be a more accurate way to put it.

To what do the city and region owe our small bit of gratitude? One oft-mentioned factor is that we didn't boom as dramatically, so our bust wasn't as painful. And that's evident from the data on home prices. Our bubble was smaller.

But another, less-noticed piece of news last week points to a different factor: the role of key people who helped sound early alarms about bad practices in the finance industry, and who moved aggressively to clean up the mess.

Two of them - Philadelphia Common Pleas Court Judge Annette M. Rizzo, and Patricia Hasson, of the nonprofit now known as Clarifi - were named last week to a 25-member panel of outside consumer experts that will advise the one-year-old Consumer Financial Protection Bureau. The CFPB - on the chopping block if GOP nominee Mitt Romney wins the presidency - is central to the Obama administration's strategy for ensuring that bad financial practices don't again stir the kind of havoc we just endured.

In the CFPB's second report to Congress and the president, made public Friday, director Richard Cordray said the agency was well on its way toward fixing "grave problems in the mortgage market" - the subject of nearly 24,000 of the 55,300 consumer complaints it fielded during its first year.

It's a long process, as both Rizzo and Hasson told me after being tapped to advise the new agency. Each has had a ground-level view of the crisis since its origins a decade ago, and each has played an important part in helping this region's residents cope.

Hasson says Clarifi, known as Consumer Credit Counseling Service of Delaware Valley when she arrived in 1998, gave her a window on practices that trapped consumers in piles of debt long before the collapse - including credit-card terms finally declared unfair and deceptive by the Fed and then barred by Congress.

Though counseling and debt management remain mainstays of the agency, Hasson has moved it toward a broader mission of promoting "lifelong financial literacy." At the CFPB, she'll be able to speak knowledgeably about the perils of student loans, payday lending, and mortgages, and promote her goal of helping "consumers navigate in a safer, more transparent financial world."

Rizzo's role has been more focused. Since 2008, she has run the special Residential Mortgage Foreclosure Diversion Program that has brought distressed borrowers together with lenders or mortgage servicers about 22,000 times in efforts to reach agreements preventing foreclosure.

Rizzo brings a judicial temperament to situations that might drive partisan advocates to rail against injustices. Just as the tea party's progenitor, CNBC host Rick Santelli, ranted about helping "the losers" when the Obama administration announced its first mortgage-modification program in early 2009, some on the left complain bitterly that banks won bailouts while distressed homeowners got the shaft - even though both lenders and borrowers mistakenly believed that $250,000 houses were suddenly, miraculously, worth $400,000 or $500,000.

When such errors are isolated events, and when more ordinary numbers of people face personal financial crises, a functioning market can deal with them. Laid-off workers can sell homes and move to take jobs. If that's not possible, they can at least sell to pay off their mortgages and find smaller quarters. Banks that believed exaggerated appraisals could always suck it up, authorize short sales, and write off the difference.

But the collapse of the housing bubble and the ensuing recession threw a monkey wrench into the market. By early 2008, Philadelphia borrowers faced a wave of foreclosures. And it was a less temperate response to that problem - a call for a moratorium on foreclosures in the city - that prompted Rizzo and President Judge C. Darnell Jones II to establish the diversion program.

Rizzo says she believed that the moratorium was doomed to fail legally, but that lenders and borrowers might well reach mutually acceptable solutions if they could come together and face the reality of the situation. At first, it was uncharted territory - including the idea that a lender might voluntarily renegotiate terms simply to keep a homeowner paying.

"Even loan modifications were thought to be a unique animal in 2008 when we started, and now they're a mainstay," says Rizzo, who has a variety of tools for cases that each turn on a particular mix of people and circumstances.

Her list includes repayment plans, reinstatements that wipe out fees and return a borrower to a sustainable path, temporary forbearances, help from Pennsylvania's Homeowners Emergency Mortgage Assistance Program, and even that bugaboo of lenders - principal writedowns.

Always careful with her words, Rizzo says that writing down principal - a step lenders also take when they agree to a short sale, though not in a way that benefits the current owner - "is one of the repertoire of fixes that should be considered in an individual case."

Sometimes, of course, the only answer may be accepting the inevitable. In today's post-bubble market, a distressed homeowner, perhaps a senior citizen without the wherewithal to maintain a house, may also have no equity to claim in a sale. "A graceful exit may sometimes be the only solution," Rizzo says.

To homeowners frustrated by the federal government's Making Home Affordable programs, where far-off lenders often seem to drag their heels rather than facilitate loan modifications, Rizzo's just-get-'em-together approach probably sounds appealing.

"I provide the theater for them just to have this discussion. When people come together, deals get made," she says.

By the way, neither Rizzo nor Hasson sees much evidence of distressed borrowers' trying to game the system - a worry of those who warn that government incentives for modifying loans creates a "moral hazard." Hasson says most people "feel a responsibility for their debt" - just as they should.

But when markets fail, people sometimes need help from government agencies such as the CFPB. And Rizzo and Hasson are just the people to help it succeed.