Foreclosure Hope, but No Cure-All
Saturday, March 15, 2008
President Bush yesterday praised his administration's initiative to stem the rising tide of home foreclosures, telling the Economic Club of New York that the number of homeowners reworking their mortgages is now increasing faster than the number losing their homes.
Bush reported that the alliance of private lenders and nonprofit organizations assembled by the Treasury Department, called Hope Now, is streamlining the process for refinancing, modifying mortgages for distressed homeowners and offering a 30-day delay for some on the brink of foreclosure. "The whole purpose is to help people stay in their houses," he said.
But lenders, borrowers and some federal officials say the initiative is, for the most part, not granting the kind of relief most likely to keep people in their homes. Instead, the mortgage lenders carrying out the program have preferred a course that could avert some foreclosures but simply prolong the uncertainty for many others.
The reason is that the private lenders asked to carry out the Hope Now program are caught between the mandate to help prevent borrowers from losing their homes and the objective of maximizing returns to shareholders.
The crux of the problem is that homeowners across the country have seen their property values plummet, making it impossible for them to refinance costly loans into cheaper mortgages. While many homeowners have been offered a temporary interest rate cut or freeze or a plan that tacks on missed payments at the end of the mortgage, lenders have rarely lowered the principal on the loan to reduce the overall burden. Such a reduction would lower payments and could allow for refinancing, two steps that financial analysts said have the highest likelihood of heading off eventual foreclosure.
That means people like Charles Alston may still lose their homes. Alston, 54, said he reluctantly agreed to a subprime mortgage in 2006 when he bought his two-bedroom condominium unit in Southeast D.C. Though the $1,600-a-month payments were tough to make on his government salary and the 7.8 percent interest rate was scheduled to reset higher this year, he said, he was assured by his lender that he could refinance into a better loan. Then, amid a downturn in the housing market, the value of his condo dropped $20,000 and refinancing was no longer an option.
After months of negotiation, his lender agreed to temporarily freeze the interest rate. But his request to either refinance or get a reduction in principal has not been granted. Alston says he's not sure how long he can hold on.
"Do I walk away now?" he asked. "Or do I wait two or three years? Then what?"
Although the government is wary of appearing to bail out people who made bad financial decisions, officials also worry about the impact of foreclosures. Analysts expect several million people to face foreclosure in the next two years. Politicians are concerned about the impact of families being thrown out on the streets, and economists say the ripple effect on neighborhoods and the broader real estate market would be devastating.
When Treasury officials revealed details of the Hope Now effort in December, officials called it the centerpiece of the administration's effort to confront the spreading subprime-mortgage crisis.
Treasury assembled an alliance of private lenders and nonprofit groups and turned the program over to them.
Last week, Federal Reserve Chairman Ben S. Bernanke urged mortgage firms to be more willing to reduce the principal of loans as a way to reduce foreclosures.