Jeannine Aversa
USA Today
A foreclosed home is seen for sale in Sacramento By Rich Pedroncelli, AP
WASHINGTON — Home foreclosures will keep rising next year no matter who is elected president in November.
Even the optimism that surrounds a new president taking office can’t resurrect home values overnight, and presidents have no direct ability to reduce rising mortgage rates. Nevertheless, Democrat Barack Obama and Republican John McCain both promise help for homeowners facing foreclosure.
Obama calls for a broader role for government than McCain, but both candidates envision the Federal Housing Administration providing new, cheaper mortgages to distressed homeowners who otherwise would have difficulty refinancing into more secure government-insured loans with lower monthly payments.
For the plans to work, lenders would have to be willing to take a substantial loss by reducing the amount owed on the loan. But some would have a powerful incentive to do so because a refinancing deal could allow them to recover far more money than they would get from the costly process of foreclosing on the property and trying to resell it.
Obama supports legislation along these lines by Sen. Chris Dodd, D-Conn., which would help around 400,000 strapped homeowners. People wouldn’t have to have good credit to qualify as long as they could show they are able to afford the new payments.
“If the government can bail out investment banks on Wall Street, we can extend a hand to folks who are struggling on Main Street,” Obama said.
McCain’s plan would provide relief to 200,000 to 400,000 homeowners but would be open only to people who could show they were creditworthy when they got their original loan.
McCain said his plan offers “every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home.”
The FHA piece of the Dodd plan would cost close to $1 billion, which would come from diverting money in the early years from an affordable housing fund financed by the profits of mortgage giants Fannie Mae and Freddie Mac. McCain’s FHA provision is estimated to cost from $3 billion to $10 billion and would be paid for by either cutting government spending elsewhere or having the federal government borrow more. The first choice is to cut government spending, a McCain aide said.
Experts predict foreclosures will continue to climb well into 2009. Some believe there’s a chance for improvement in late 2009, but more think that won’t happen until 2010.
Why? A long-term solution is tied to a turnaround in house prices. Slumping home values are blamed for the bulk of the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth, so they walk away from their homes. Dumping more empty houses on the market adds to the pile of unsold homes, and that drives home prices down further. It’s a vicious cycle.
“This is uncharted territory,” said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania‘s Wharton School of Business.
Some predict house prices won’t turn up until the spring selling season of 2010 — at the earliest.
Lawrence Summers, a former Treasury Secretary in the Clinton administration, predicted more than 2 million foreclosures are coming over the next two years, and up to 15 million homeowners will owe more than their house is worth, as house prices continue to fall.
Fifty-seven percent of Americans say housing prices are important to them personally, according to a recent AP-Yahoo News poll. For many, their home is their biggest asset. As home prices dropped, so did Americans’ net worth — leaving people feeling less financially secure and more gloomy about the economy’s direction.
Which candidate would do a better job of handling housing prices? Twenty-five percent said Obama, while 17% thought McCain. Nearly 30% said neither.
Although most voters think the next president will have a “great deal” or “some” influence over housing prices, the reality is there’s no quick fix.
“The odds of that are slim to none,” said Cal Jillson, political science professor at Southern Methodist University. If the next president can make people more optimistic about the future, “the slow rebuilding of confidence will help to increase home values,” he said.
When it comes to handling the broader economy — the top concern of voters, 32% picked Obama, while 28% went with McCain, the poll said.
There’s another complicating factor that could push up foreclosures and that presidents don’t control: Federal Reserve action. If the Fed is forced to boost interest rates to fend off inflation that would hike payments for struggling homeowners whose mortgage rates are resetting. “We are very exposed to interest rate risks and mortgage payment shocks in 2009,” Wachter said.
Mortgage rates, including those on 30-year home loans, already have been climbing — pushed by inflation worries.
In addition to his FHA proposal, Obama calls for creation of a $10 billion foreclosure prevention fund that boosts counseling for distressed homeowners before they slide into foreclosure, helps people sell homes they bought but couldn’t afford and teams with state governments, community groups and lenders to make sure loans can be modified in a timely manner to avoid foreclosure or bankruptcy.
His approach, which reflects the traditional Democratic preference for more government intervention, also would create a 10% mortgage credit for people who don’t itemize their taxes. That would provide 10 million homeowners, most of whom earn under $50,000 a year, with an average of $500 in savings, his campaign says. And, that should help those struggling to keep up with their mortgage payments.
Obama also supports changing bankruptcy laws so that homeowners going through that process can renegotiate terms of their mortgages — just as people or investors who own multiple homes or vacation homes can do.
And, Obama also would move to combat mortgage fraud and improve mortgage disclosure. Deficiencies in those areas contributed to lax lending that allowed people to take out home loans that their incomes couldn’t support, critics say.
“This kind of transparency won’t just make our homeowners more secure, it will make our markets more stable, and keep our economy strong and competitive in the future,” Obama said.
McCain prefers a more limited government role in dealing with the housing crisis, consistent with traditional GOP leanings. The other component of his plan calls for the Justice Department to set up a task force to investigate possible wrongdoing in the mortgage industry. The Justice Department has been pursuing cases of fraud and other mortgage-related matters.
“In some cases, lenders and borrowers alike were caught up in the speculative frenzy that has harmed the housing market,” McCain said. “And it is not the responsibility of the American public to spare them from the consequences of their own bad judgment.”
Congress has been working on a broad housing rescue package that would allow the FHA to help struggling homeowners. Differences have to be worked out between Dodd’s plan, which is pending in the Senate, and a similar House-passed package by Rep. Barney Frank, D-Mass., and with the White House, too. The White House has repeatedly threatened a veto but is working behind the scenes with congressional leaders to find common ground.
The rescue plans envisioned by Obama and McCain — and Congress — would deliver short-term help but aren’t a cure-all, housing experts said.
Long-term strategies are needed to prevent a repeat of the foreclosure crisis, experts said, and that must revamp the regulatory structure to improve oversight of players and borrowers in the mortgage finance system. The political debate on such a broad overhaul has already started in Washington and will likely spill over to next president and Congress. Both Obama and McCain have indicated they favor tougher regulation.
