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Foreclosure Plan May Help Some but Not All

President Obama’s new plan to help slow the avalanche of mortgage foreclosures certainly won’t help all troubled borrowers keep their homes. But for millions whose home values have plummeted while their monthly payments have soared, the proposals do offer real hope that instead of facing foreclosure, families will be able to lower their monthly payments and hold on to their residences.

In effect, the Homeowner Affordability and Stability Plan (HASP) is betting that with enough federal incentives to borrowers and lenders alike, homeowners who owe more than their homes are currently worth can be persuaded not to simply walk away and abandon their properties. Instead, they would be able to pay lower monthly rates until the economy, and perhaps their home values, rebound. To alter existing loans, lenders will be given new cash incentives.

“This plan will help enough people that we can get some stability back into the market,” says Mark Seifert, executive director of Empowering and Strengthening Ohio’s People (ESOP) in Cleveland, whose counselors work with homeowners to modify loans they are having trouble paying.

“There’s no question they are trying to make it so the homeowner has some skin in the game,” Seifert adds. “I mean, if you don’t address the affordability problem, everybody will simply start walking away from their homes.”

Obama’s announcement of his new housing plan came in the same week he signed a $787 billion stimulus package to boost employment and cut taxes. Many analysts believe that no turnaround is sustainable without addressing the housing crisis.

Who may get help

The complete details of the housing plan will be released on March 4. They revolve almost entirely around making loans more affordable by reducing the interest rates of existing home loans. The plan does not propose methods to write down (reduce in value) the underlying principal of a loan that is clearly higher than the home’s current value, although Obama has again asked Congress to empower bankruptcy judges to reduce home mortgages on primary residences to their fair market value. Legislation on this issue is pending.

Two distinct groups of homeowners will benefit from the new plan:

• Homeowners with so-called conventional mortgages of $417,000 or less, whose loans are held by the government mortgage agencies Freddie Mac and Fannie Mae. These borrowers are stuck paying higher interest rates than currently available because the shrinking value of their homes means they don’t have enough equity to refinance.

The administration says it can help 4 million to 5 million homeowners by easing Fannie and Freddie’s rules and allowing the agencies to refinance up to $420,000 on a house currently worth only $400,000—or 105 percent of the home’s value.

• Borrowers who have seen their economic circumstance come undone. George Trice, 83, of Cleveland would fall into that category. Trice refinanced his home about 10 years ago to add an addition and do other improvements; then, more recently, he suffered a stroke. More than half his monthly income, which comes from Social Security, now goes toward his mortgage—$653 out of $1,037. Trice owes $76,000 on the house he has lived in for 62 years, but it was recently appraised only in the low $80s.

“I asked the bank if they might lower my payment, but they said I didn’t have enough money in the house,” Trice explains. “I want to keep my house, but it’s getting harder and harder to keep up. I’m getting squeezed.” His daughter, Janet Johnson, says, “Between the food and the medicine, the gas and the light and phone, and the taxes, he doesn’t have enough. He’s barely making it.”

Under the Obama initiative, the government will create a $75 billion fund to subsidize loan modifications for those, like Trice, whose monthly payments now exceed 38 percent of family income. If his lender agrees to slash the mortgage to the 38 percent level (it would be $497), the government will match the lender’s costs in reducing Trice’s monthly bill even further, to $405 per month for up to five years (31 percent of his income). That would put extra money in his pocket each month. Trice, who says he is anxious to clear things up so he can relax, is hopeful.

More than 684,000 homeowners age 50 and over were either delinquent or in foreclosure at the end of 2007 (the most recent figures available), representing 28 percent of delinquencies and foreclosures.

A key to getting mortgage holders to go along, analysts say, is that the Obama plan pays banks and servicers who agree to modify the home loans they hold. A financial institution could claim $1,000 from the government for every loan it modifies, and an additional $1,000 per year for up to three years, provided the borrower stays current on the loan. In addition, mortgage servicers would receive $500 and financial institutions $1,500 to modify an at-risk loan like Trice’s before the borrower falls behind.

Who may not get help

The administration estimates that the plan could help 7 million to 9 million families avoid hardship or foreclosure. But many others won’t find help in this program:

• Residents in states like Florida, Arizona, Nevada and California, who have seen housing prices fall off a cliff, may not get much relief from HASP because their housing values have fallen so quickly—as much as 40 percent in one year. As a result, they owe much more than their properties are worth. Government mortgage agencies won’t write a new mortgage where the outstanding debt is 50 percent more than a house is currently worth. Already, John Courson, head of the Mortgage Bankers Association, has suggested that Fannie and Freddie raise their lending cap beyond 5 percent over the appraised value.

• Homeowners whose mortgages aren’t being held or guaranteed by Freddie or Fannie will have to see whether their lenders will actually consent to rewrite the mortgage. Again, those living in areas of the country most affected by the collapse of home values may have the hardest time getting their banks to modify loans.

The plan also doesn’t tackle the larger debt crisis many households now face, since many families who are behind on their mortgages also have large credit card and other debts.

Pros and cons

Some critics say HASP will unfairly reward delinquent borrowers or those who should not have received mortgages in the first place, while responsible borrowers who continue to pay their loans each month will gain no reward.

But administration officials insist it is more effective to try to solve the mortgage problem and spark an economic rebound than audit past mistakes. “There are clearly a lot of loans that should not have been made,” Sheila Bair, head of the Federal Deposit Insurance Corp., said in a radio interview last week. There are a lot of people involved: mortgage brokers, lenders, mortgage owners, mortgage investors and borrowers themselves.

“To try to punish all of those parties now by foreclosing on more homes, putting more families on the street, putting more houses onto the inventory, creating more downward pressure on home prices when you have so much inventory on the market right now—is that in our collective economic interest to do that? I just don’t think that it is,” Bair said.

Almost all the largest banks have agreed to suspend any new foreclosures until the plan’s guidelines are released in early March. But ESOP’s Seifert says he is already seeing a dramatic change in attitude among lenders in Ohio, who until recently proved reluctant to modify their portfolio of troubled home loans.

“I’m seeing a change of mood,” he says. “We have already noticed that some of our partner banks and servicers are, all of a sudden, getting aggressive about doing loan modifications. If suddenly they are getting $4,000 or $5,000 to change a loan, and the terms make it more likely a homeowner will make his payments, then it changes the incentives a little bit.”

Michael Zielenziger is based in Oakland, Calif., and writes on business and the economy.

 

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