Millions could get help, but is foreclosure plan fair?
Stephanie Armour
USA Today
By Stephanie Armour, USA TODAY
The Obama administration’s $75 billion housing rescue plan promises to help millions of financially struggling homeowners keep their homes, but it may be too little and too late for millions of others.
More than 3 million owners have lost their homes during the past three years, and almost 5 million more could follow this year through 2011, according to Moody’s Economy.com.
Obama’s plan calls for measures that will allow up to 9 million homeowners to reduce their mortgage payments through government-backed refinancing arrangements. Just how that will work isn’t clear. The administration said that on March 4 it will provide more details on the plan and when it will go into effect.
Until then, homeowners in trouble — many of whom have adjustable-rate loans with rising payments and little chance of refinancing because of falling property values — are being urged to check with their lenders to see whether they might benefit.
The Obama plan reaches out to those at risk of default, rather than just those already facing foreclosure, and it offers mortgage servicers — the firms that collect payments — financial incentives to modify loans. In addition, the Treasury Department said Wednesday it will commit up to $200 billion more to mortgage giants Fannie Mae and Freddie Mac to try to keep mortgage rates low. It pledged $200 billion — $100 billion apiece — to them last fall when the government took them over.
Many heralded the plan Wednesday but also raised questions about how successful it will be. On Capitol Hill, some Republicans — amplifying criticisms by homeowners who didn’t buy more expensive houses than they could afford and have paid their mortgages on time — challenged the fairness of an expensive bailout.
House Republican Leader John Boehner, R-Ohio, and Republican Whip Eric Cantor, R-Va., sent the president a letter asking, “What will your plan do for the over 90% of homeowners who are playing and paying by the rules?”
Economists had a more measured reaction. “This is a nice mix of policy steps that will have a mitigating impact on foreclosures,” says Mark Zandi of Moody’s Economy.com. “It won’t stem foreclosures, but it will mitigate the increase.”
Establishing a standard loan-modification process that applies to most mortgage servicers will help spur refinancing and modifications while providing legal coverage to ward off lawsuits by investors, Zandi says.
Reducing foreclosures and stemming the historic decline in housing prices are crucial to repairing the overall economy.
Falling home prices have hurt banks and other financial firms, leaving them less able to lend. States and localities have taken a hit in the form of declining tax revenue and blighted neighborhoods. The housing free fall has plagued home builders as foreclosed homes have gone back on the market, swelling an already huge inventory.
Prospective homeowners have found it increasingly difficult to get credit as asset prices fell and worried bankers tightened loan standards. Some buyers, on a bet that prices will fall even further, have decided to postpone buying a house, thereby lengthening and deepening the crisis.
In a speech Wednesday, Cleveland Fed President Sandra Pianalto noted that housing starts have plunged by more than 60% since peaking in 2006, with builders now holding a huge, 14-month inventory. “Stabilizing housing prices will help stem foreclosures, bolster bank balance sheets, restore consumer confidence and shore up consumer spending,” she said.
The new efforts come atop a recent Fed initiative to buy mortgage-backed securities, which Fed Chairman Ben Bernanke said Wednesday had pushed mortgage rates down by nearly a full percentage point. But the coordinated efforts have their limits.
“The Fed and the Treasury will do all they can to drive mortgage rates lower,” says Richard Schlanger, portfolio manager for the Pioneer mutual funds. But banks continue to tighten their lending standards, which means that mortgages at low rates still could be tough to get. Furthermore, few banks will want a portfolio full of mortgages yielding 4.5% if they think rates will rise later, Schlanger says.
Homeowners who were financially conservative and can meet their monthly mortgage payments have a stake in the housing plan’s success. Americans have lost as much as $13 trillion in wealth as stock and home prices have plunged, says Nariman Behravesh, chief economist of IHS Global Insight. Because household spending is related to household wealth, declining home and stock prices have contributed to a staggering fall in consumer spending. “The wealth effect is humongous,” he says.
Those who will be directly helped by the Obama plan include homeowners on the cusp of foreclosure, those making monthly payments but struggling to do so and those at risk of falling behind. They include people such as Rodney Rose, who is fighting so hard to make his mortgage payments he’s put off payments on credit cards and other debts.
The Bowie, Md., resident has watched the value of his home fall from about $425,000 to $319,000, and he’s worried about how to pay his mortgage once his adjustable-rate loan moves to a higher rate.
“I’m struggling. I had to stop paying my student loans,” says Rose, a father of two and who works in the housing industry. “But with this plan, I’m hopeful.”
A question of fairness?
Other homeowners aren’t as pleased. They worry that the plan amounts to a handout to homeowners who stretched to afford more than they could, and that it isn’t fair to mortgage holders who make payments on time.
Ted Hellier, 53, a carpenter in South Portland, Maine, says he pays three mortgages on time every month and has never had a late payment in 20 years. For him, the Obama plan raises a question of fairness.
“People like me deserve to have a chance to lower our mortgage payments,” says Hellier. “I am tired of handouts. Other people can renegotiate loans to 4% and other (favorable terms). I have a 14- and an 11-year-old, and their grandkids are going to pay for this nonsense.”
And others fear the plan won’t do enough to slow foreclosures already underway. For a large number of homeowners already on the brink of default, the Obama administration’s housing rescue plan may not help.
“There are a lot of carrots in the plan, and it will help, but it’s not the silver bullet,” Zandi says. “We will still see foreclosures.”
Just ask Denise Parker. The financial rescue plan sounds like a promising way to help out troubled homeowners like herself.
But for her, the plan seems too late. The single mother of three can’t pay her adjustable-rate mortgage, whose monthly payments have jumped from $3,700 in 2005 to more than $4,000 today. She works two jobs to try to make enough money to get by, but she’s behind in house payments and has gotten a foreclosure letter saying her home will be up for auction Friday.
“What do I tell my kids?” Parker asks. “I don’t know where I’m going to go.”
Help for refinancers
A key element of the plan is refinancing help. Homeowners who took out loans owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance through those institutions, even if they owe more than their homes are worth.
Currently, homeowners who owe more than 80% of the value of their homes have difficulty refinancing. Nearly one in seven homeowners, or about 12 million, are “under water,” meaning their home’s value is less than the amount of their mortgage, according to Moody’s Economy.com. That’s nearly double the 6.6 million who were in that position at the end of 2007.
The plan also includes incentives to encourage mortgage servicers — who collect fees for refinanced and delinquent mortgages — to work with qualified borrowers to modify loans. Servicers will get $1,000 for each eligible modification they make, and another $1,000 a year for three years as long as the homeowner remains current on payments. Homeowners who stay in their properties and are current will get a monthly balance reduction to help reduce their loan principal. That will amount to up to $1,000 a year for five years.
Government funds would be used to avoid defaults. The plan includes an incentive of $500 to lenders and $1,500 to homeowners if loans are modified before mortgage holders fall behind.
Other parts of the plan aimed at stabilizing the housing market are particularly controversial.
The administration’s endorsement of a change in the bankruptcy law, which requires congressional approval, would give bankruptcy judges the power to lower the interest rate or extend the repayment period on home mortgages. More significant, it would allow them to reduce the principal amount owed to the home’s fair market value, says Sam Gerdano of the American Bankruptcy Institute.
Many modification programs in force now don’t do that. Instead, homeowners may be allowed to defer back payments, or get more time to pay their loans, but some default again.
Much of the financial services industry has opposed the change, arguing that a more lenient law could be used by homeowners to get rid of homes that have declined in value, even if they can afford their mortgage payments.
Under the current bankruptcy law, judges can modify a mortgage for a vacation home or a commercial building but not for a principal residence, says Henry Hildebrand, a Chapter 13 bankruptcy trustee in Nashville.
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