Mortgage Initiative Mired In Details
Friday, February 6, 2009
While senior administration officials are finalizing the central elements of their rescue plan for the banking system, they are not as far along in working through the daunting details of how to spend as much as $100 billion to help homeowners facing foreclosure, two sources close to the discussions said yesterday.
Obama administration officials view the mortgage initiative as critical to turning the ailing housing market around and making the politically unpopular bailout more palatable, other sources said. But designing what could be the most sweeping foreclosure prevention program in decades has not been easy. Officials have said they will unveil their rescue plan for the financial system on Monday but have not said whether the mortgage modification effort would also be announced then.
In trying to stem the soaring rate of foreclosures, the administration is aiming to resolve three core issues: How to get help to the right homeowners, how to aid lenders that modify mortgages without encouraging these firms to make bad decisions in the future, and how much risk the government should bear to boost the housing market.
Obama's advisers said there was merit to an idea proposed last year by the Federal Deposit Insurance Corp., which called for the government to absorb losses if lenders modify mortgages, for instance by lowering the interest rate, and the homeowners end up defaulting anyway, sources said. But some of those officials also think the program puts too much taxpayer money at stake for the amount of help provided to homeowners, the sources said.
The new plan may be a hybrid that includes elements of the FDIC idea as well as other proposals from economists and government officials, they added, speaking on condition of anonymity because no final decision has been made.
The administration effort would not be the only initiative aimed at reviving the housing market, which officials consider a crucial step in ending the recession. Several other proposals are pending in Congress.
But a separate Treasury Department plan developed last year to reduce the mortgage rate for new home buyers to 4.5 percent has stalled. Some government officials and lawmakers including Rep. Barney Frank (D-Mass.) say the approach is far too expensive. Several Republican senators, however, continue to push the idea, saying its cost could be capped at $300 billion.
The high cost of this program relative to the benefits it offers homeowners could also make it unworkable, sources said. Similar concerns weigh on the FDIC proposal. Under that plan, if a borrower defaults again on a loan six months after receiving a modification, the government would absorb up to 50 percent of the losses. The FDIC had estimated the program could help 1.5 million homeowners at a cost of about $24 billion. But when Bush administration officials examined the initiative late last year, they said the cost could be several times as much.
Yet the government does not want to design a program that, on the other extreme, would force mortgage lenders to shoulder too many losses. Otherwise, few, if any, would be willing to participate. Last year, for instance, the Department of Housing and Urban Development launched Hope for Homeowners to refinance borrowers into more affordable loans, but it has attracted little interest. Only 451 homeowners have applied for the program so far, and none has received a new loan, yet.
Lenders balked at a requirement that would have forced them to forgive some of the borrower's debt. Congress is now considering changes to that program to make it more attractive to industry.
But if the Obama plan does not include reductions in the principal borrowers owe, officials might be criticized for not doing enough to help homeowners whose property values have fallen. About one in five mortgage holders are "underwater," or have a home worth less than the mortgage on it, according to First American Corelogic data. Those homeowners are among the most likely to fall into foreclosure.
"If you're really going to tackle this problem, if you are going to stem the real surge in foreclosures, the plan has to include loan modifications with write-downs of principal," said Mark Zandi, chief economist with Moody's Economy.com, who has advised both former GOP presidential candidate Sen. John McCain and Democrats on Capitol Hill. "It would cost $250 billion, but the price tag is growing as home prices fall."
The third issue facing the administration is how to limit a program to exclude two groups of homeowners: those who could make it on their own without help and those who would fall into foreclosure even if they received help.
Industry efforts to confront the foreclosure crisis have been hobbled by the large number of borrowers who receive help then quickly become delinquent again. An industry alliance, Hope Now, has said lenders completed more than 2 million loan workouts last year, but acknowledges that this figure probably includes borrowers who required help more than once. In recent months, lenders have rolled out programs that more aggressively modify loans, but the landscape is still dominated by a hodgepodge of approaches with varying records of success.
"There is a lot of tension in the industry that they don't want to over-medicate the issue. That is not the problem. The issue is that we have to stop the hemorrhaging," said Marietta Rodriguez, national director of homeownership programs at NeighborWorks.
Other approaches to preventing foreclosures are gaining traction, including legislation to allow bankruptcy judges to modify the loans by reducing the principal owed on the mortgage. Despite opposition from Republicans and many in the financial industry, a House committee passed the legislation last week and Democrats are debating how to move it forward.
Some Republicans, in the meantime, are pressing for measures to stem foreclosures by stimulating the housing market. Lawmakers have already attached a $15,000 home buyers tax credit to the economic stimulus package being debated on Capitol Hill and are considering other measures.