For Some, Bush's Mortgage Plan May Just Prolong Uncertainty
By Renae Merle and David Cho
Washington Post Staff Writers
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.
"Anecdotal evidence suggests that even in the best-case scenarios, borrowers given repayment plans re-default at a high rate," he said at a banking conference in Orlando.
This is because some homeowners, once they get back on track, will face the same steep payments that initially got them into trouble. Others will see their interest rates reset at higher levels once the freeze lapses or float higher as their variable rates rise with the market.
Though financial analysts and non-profit groups say principal reduction is the best way to avoid default, lenders say they avoid that option.
Reducing principal may help ordinary homeowners but would create massive losses for investors, said Tom Deutsch, deputy director of the American Securitization Forum, the largest association of debt investors and a member of Hope Now.
"If servicers wrote down principal, it would certainly reduce the foreclosure rate, but writing down principal creates a lot of difficulties," he said. A mortgage firm that modifies a "loan solely for the benefit of policymakers rather than [the investor], could find themselves in legal jeopardy."
Principal reductions are being considered more, but they still are rare, said Tom Kelly, a spokesman for J.P. Morgan Chase, which services about $20 billion of subprime home loans. "It's the investors who have to say go ahead or don't go ahead," he said.
In California, one of the few states to compile extensive data about loan workouts, fewer than 2 percent of homeowners who got help from their lenders in January saw their principal reduced. By contrast, about 22 percent were put into repayment plans, which allow borrowers to make up their missed payments over time, according to the California Department of Corporations.
A report by the Mortgage Bankers Association showed that nearly one-third of homeowners in foreclosure proceedings in the third quarter of last year had tried a repayment plan or loan modification. Those efforts failed to keep the borrowers out of default.
Treasury officials say solutions need to be tailored to individual homeowners. Some may need just a little bit of help to get through a short period of financial hardship, caused for instance by a divorce or temporary job loss, and a reduction in principal is not necessary.
"Treasury expects Hope Now members to continue working toward sustainable solutions to help borrowers keep their homes, which may mean any one of a variety of options," said Robert K. Steel, undersecretary for domestic finance. "Servicers have no incentive to modify someone into an unsustainable loan because foreclosure is a costly outcome for the investor and the borrower."
When Ocwen Financial, which services nearly $60 billion in subprime loans, offers to modify a mortgage, it needs to get permission from about 25 percent of the investors that hold the mortgages. Some don't allow it.
As a result, when Ocwen offers to modify a loan, it begins the discussion by proposing a reduction in borrowers' monthly payments by adjusting their interest rate, said William Rinehart, Ocwen vice president and chief risk officer. "If that is not enough and we determine that a customer has a loan balance well in excess of the value of a property we may consider adjusting the principal."
Falling home prices are forcing more lenders to consider reducing principal, Rinehart said. "We will lower the principal to make the payments affordable, but we're not necessarily going to lower it to get them equity," he said.
Investors who hold mortgage securities include mutual funds, retirement accounts, pension funds, hedge funds and big financial institutions. Steve Bartlett, chief executive of the Financial Services Roundtable lobbying group and Hope Now member, said these investors would suffer big losses if lenders reduced the principal of home loans on a large scale. That in turn could force up the cost of future borrowing since lenders would have to make up their losses by charging more for loans, Bartlett and Treasury officials said.
After receiving limited help from their lenders, some homeowners say they continue to struggle with their payments. Others question whether it is worth it to stay in their homes.
Vickie McCrary's lender threatened her with foreclosure after her mortgage payments jumped from $1,700 to $2,200 a month on her Chesterfield, Va., home. As a subprime borrower, McCrary, 24, could not refinance into a better loan without facing a prepayment penalty. After the value of her home fell, she couldn't refinance at all unless her loan principal was reduced. She soon fell behind on her mortgage.
Ultimately, after adding $5,000 to the loan amount for late charges and other fees, the lender agreed to restore McCrary's monthly payments to $1,700. She said she can make the payments for the time being.
"It has proven to me that homeownership is not for everyone," she said. "They call it the American Dream. For some people it becomes a nightmare."
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