Merits of New Mortgage Aid Are Debated
Tuesday, March 4, 2008
The U.S. Treasury said yesterday that its mortgage-assistance initiative helped 45,000 distressed subprime homeowners get new loans in its first month, but a veteran mortgage banker who helps run the program said many of them may not receive long-term relief and could ultimately face higher total costs.
While some borrowers stand to benefit from a temporary reduction in their interest rates, others may not, instead being given loans that just allow them more time to repay their debt, said Bill Longbrake, a senior policy adviser for the Financial Services Roundtable lobbying group and vice chairman of Washington Mutual. The latter group of delinquent homeowners could face additional charges and late fees for missing payments. Only a very small group of borrowers could get their mortgage principal reduced outright, he said.
When the Bush administration announced the effort last year, officials said they were offering a long-term solution to a growing foreclosure crisis. The program, which is being run by a Treasury-brokered alliance of lenders and nonprofit groups that calls itself Hope Now, offers loan modifications to subprime mortgage holders whose interest rates have jumped in the past year, granting them a five-year rate freeze so they can work out new terms with their lenders.
But financial firms have been reluctant to offer generous loan modifications because they have to consider the returns of the investors who buy mortgages and provide the crucial financial backing for the loans, Longbrake said.
"A mortgage servicer's obligation is to get the maximum value to the investor over the life of the loan," he said. "If you are going to modify the loan and keep the borrower in the house, the bias is to do that for a shorter rather than longer period of time. . . . There's a reluctance to do long-term modifications."
Though Longbrake is responsible for monitoring the progress of the initiative, he said his assessment was based on his understanding of how mortgage lenders have traditionally operated and not on specific data.
"Old practices change slowly," he added.
A spokeswoman for the Treasury said Hope Now's goal is to prevent foreclosures. But she declined to comment further or answer questions on the type of loan modifications offered by lenders.
In an interview yesterday, Treasury Secretary Henry M. Paulson Jr. said that the number of homeowners helped in January would have been greater but that many lenders would not be ready to implement the Hope Now initiative until the end of the month. He said he expected the number of homeowners enrolling in the program to increase in the coming months.
Paulson added that since late December, subprime homeowners have also benefited from a sharp decline in a key long-term interest rate, called the London Interbank Offered Rate, which has eased their payment burden. As a result, some no longer need help from Hope Now, Paulson said.
"The biggest news is the interest rate reductions," he said. "These borrowers aren't going to need to make any changes in their mortgages to keep their homes."
For instance, subprime borrowers with adjustable-rate mortgages whose rates were jumping to 11 percent three months ago are now facing an increase to 8.5 percent, according to Tom Deutsch, deputy executive director of the American Securitization Forum, a key member of the Hope Now alliance.
Hope Now officials said detailed figures on which modifications are being used will not be ready for at least two months.
The types of modifications vary by lender and borrower, said Faith Schwartz, executive director of Hope Now. Extending the terms of a loan is just one option available, and sometimes late fees can be waived, she said.
"Servicers recognize that a loan modification that is unsustainable is not in anyone's interest," Schwartz said. "For subprime [borrowers], affordability is a real driver."
Yesterday's report stoked the debate over whether the Hope Now initiative is effective.
Nonprofit groups raised concerns that loan modifications have largely provided only short-term help. John Taylor, chief executive of the National Community Reinvestment Coalition, faulted the administration for failing to detail how borrowers are being helped to avoid foreclosure.
"Failure to provide real information raises real questions about the success of [Hope Now's] efforts," he said.
Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. who has been an ally of the Treasury, said she was "encouraged by the higher level of homeowners being helped."
She added that she was concerned about another element of the mortgage-assistance program that does not change the terms of loans but works out a more manageable repayment schedule. Bair said these repayment plans "may be unsustainable for borrowers and lead to later delinquencies and contribute to ongoing borrower distress. It is critical that borrowers have loans they can afford over the long term."
Democrats accused the Bush administration of playing with the numbers. Sen. Charles E. Schumer (D-N.Y.), who chairs the Joint Economic Committee, called the numbers an "improvement but somewhat misleading."
Sen. Christopher J. Dodd (D-Conn.), who chairs the Senate Banking Committee, said, "There is also a question as to whether these modifications are long-term or whether the servicers are simply adding arrears back into the loan, resulting in a higher payment for some borrowers that receive a so-called modification."