Housing Plan Could Have Limited Reach
Saturday, May 3, 2008
A plan to spare homeowners from foreclosure would aid about 500,000 households over the next four years, far fewer than its Democratic authors have predicted, according to an estimate released yesterday by the Congressional Budget Office.
Aides to Rep. Barney Frank (D-Mass.), the proposal's main author, have said the plan would assist as many as 2 million households, citing estimates by industry analysts. Under the proposal, which will be considered on the House floor next week, the government would offer mortgage insurance to even the riskiest borrowers in hopes of persuading their banks to forgive a portion of their debt, lower their mortgage payments and help them keep their homes.
But the CBO found significant obstacles to that plan. The agency predicted that about 2.8 million of the 9 million homeowners who hold subprime or other exotic mortgages are likely to face foreclosure over the next four years. While many of those borrowers would be eligible for new government-backed loans, the report said, "most would not be refinanced under the proposed program."
The chief reason: About 40 percent have second liens, and the holder of the second lien has little incentive to participate in a plan to forgive a portion of the debt. "Second lien holders may prefer to retain their existing loans with the expectation that borrowers' repayments will be greater in the future," the report said.
In addition, other borrowers will fail to respond to news of the program, the report said. Still others won't be able to afford even a cheaper loan because of "a significant event, such as job loss, illness, divorce or death."
Of the approximately 1.4 million borrowers remaining, less than 40 percent are likely to find their primary lenders willing to participate in the program.
The low participation rate, however, would make the program relatively cheap. Even assuming that a third of the loans default, forcing the government to pay off lenders and take possession of the homes, the program will cost about $2.7 billion over the next five years, the CBO said. That is far less than under more modest proposals to deal with the housing crisis.
Steven Adamske, a spokesman for Frank, called the estimate "very good news."
"We have always known this was going to help at least half a million people. We have some studies that say it will be higher," Adamske said. "What we're trying to do is slow the incredible increase in foreclosures and slow the unfortunate drop in house prices. As the economy figures out where we're going to go next, we'll just have to see."