Critics are slamming the latest government plan to modify troubled mortgages for Americans facing foreclosure, saying it will leave behind hundreds of thousands of people who owe more than their properties are worth.
The plan announced Nov. 11 to rework mortgages held by finance giants Fannie Mae and Freddie Mac will be offered only to borrowers who are 90 days delinquent on their loans and who can afford to pay up to 38 percent of their gross income toward housing. The plan begins Dec. 15.
John Taylor, president and CEO of the National Community Reinvestment Coalition, an activist group, predicts that the plan will curb only a fraction of the thousands of foreclosure filings each month. Moreover, he says, government help is coming too late in the process.
“Why must a person be in default to be able to qualify?” he asked. “By the time someone’s three months behind in his mortgage payments, there are so many fees and penalties, it’s too late.”
He says any plan to restructure mortgages should be available to troubled borrowers before they are underwater and in default. Those borrowers aren’t difficult to identify, he says; they’re already struggling with current mortgage payments before their loans reset to higher, unaffordable interest rates.
“We can’t wait for people to fall off the edge to catch them. We have to convert these predatory mortgages into standard mortgages that most Americans are used to seeing,” Taylor says. Otherwise, foreclosures will continue to mount.
More than a quarter of all delinquencies affect homeowners over the age of 50, according to AARP research.
The new loan modification plan includes lowering the mortgage interest rate to as little as 3 percent for five years, deferring some of the principal owed or extending the loan to 40 years, officials said.
The model is based loosely on the Federal Deposit Insurance Corp. (FDIC) program to restructure troubled loans owned or serviced by the failed IndyMac Bank, which the agency took over in July. Some 18,000 borrowers have been offered loan modifications so far but up to 40,000 may be eligible, says FDIC spokesman Andrew Gray.
Like the Fannie Mae and Freddie Mac plan, the FDIC plan also aims to keep house payments at no more than 38 percent of gross income and offers lower interest rates and longer terms to replace the subprime loans that troubled IndyMac homeowners carried.
By contrast, the nearly 31 million mortgages guaranteed by Fannie Mae and Freddie Mac tend to be conventional and not subprime loans, which are at the heart of the current foreclosure crisis. As a result, even some advocates questioned how far-reaching this proposal would be.
Paul Leonard, director of the California office of the Center for Responsible Lending, says he appreciates that the government is “beginning to get it” by offering a program to help homeowners in default, but he argues that “it doesn’t go far enough.”
Many have also expressed disappointment that the U.S. Treasury didn’t follow the FDIC’s model sooner to extend help to homeowners. The plan has been pushed for weeks by Sheila Bair, chairman of the FDIC, in discussions with Treasury officials.
Bair called the Nov. 11 Fannie-Freddie package “a step in the right direction” but said it falls short of “what is needed to achieve wide-scale modifications of distressed mortgages.” In a statement, she also said it wouldn’t fix the front-end problem of “too many unaffordable home loans.”
Leonard takes particular issue with the “perverse requirement” that homeowners must be three months late on their mortgage to qualify for a loan modification.
“There are a large number of loans for which payments are resetting and those borrowers will have problems being able to afford them after payments reset,” he says. “You can rework their loans before they’re 90 days late, when their credit rating is already screwed up.”
Carole Fleck is a staff writer at AARP Bulletin Today.