By Renae Merle and Dina ElBoghdady
Washington Post Staff Writers
Thursday, March 5, 2009
The Obama administration yesterday sketched in the details of its most ambitious attempt to reduce foreclosures and stabilize the beleaguered housing market at the root of the economic meltdown.
The program has two key elements: a refinancing program for borrowers with little equity in their homes but current on their loans, and a $75 billion program to help reduce mortgage payments for struggling borrowers.
Several large lenders praised the program, including Bank of America and Wells Fargo. There were also converts among those outside the industry. "I was skeptical at first, but I think these guidelines are helpful in a lot of ways," said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit group that has been critical of industry efforts to modify mortgages.
Homeowners with loans as large as $729,750 could see their interest rates temporarily cut to as low as 2 percent under the program. The administration also said it will add new incentives to persuade lenders that hold second mortgages to give up their claims, further lowering homeowners' debt obligations. While the Obama administration initially said it would focus on owner-occupied properties, Fannie Mae and Freddie Mac said they would refinance loans for some second homes and investment properties, too.
That the programs would apply to mortgages worth up to $729,750 throughout the country and not just in high-priced regions surprised some industry officials who praised the move. "It will allow us to help more borrowers, especially those who have been hit hardest by the current crisis," said John A. Courson, chief executive of the Mortgage Bankers Association.
But others said the program is still too costly and does not do enough to address the free-fall in home prices that has helped fuel the foreclosure crisis. At least one in five U.S. homeowners with mortgages -- or about 8.3 million households -- owed more on their mortgage than their homes were worth by the end of 2008, according to data released yesterday by First American CoreLogic. The government program does not require lenders to cut the principal that homeowners owe to current values, a costly step advocated by nonprofit groups but rejected by most lenders.
"Until you find some way to come at that head-on, you are going to avoid some foreclosures, but you are also kicking the can down the road and hoping home prices go up," said Mike Larson, a housing analyst with the Weiss Group, an economic research firm in Florida. "That is a bet that I think is a little problematic."
It comes as the House prepares to vote on another key part of Obama's housing plan: legislation to allow bankruptcy judges to modify troubled mortgages. House Democrats agreed this week to narrow the bill, and lawmakers are expected to vote on it as soon as today.
While administration officials said homeowners could apply for help beginning yesterday, lenders were quickly overwhelmed and industry officials said they will likely need a few weeks to update their technology to process the applications. J.P. Morgan Chase said call volume spiked 150 percent yesterday. SunTrust said calls surged 50 percent.
Jennifer Du Plessis, a mortgage adviser at Prosperity Mortgage in Reston, said that when the administration said two weeks ago that it was preparing a plan, her phones were ringing off the hook with borrowers eager to refinance. She collected contact information from all the callers, but she still cannot act on their loans.
"Right now, if I tried to refinance a loan that didn't have equity, our computer system wouldn't even allow it," Du Plessis said. "There's still an implementation period," because computers were programmed to reject such people as bad risks.
Bank of America said yesterday that it temporarily moved staff to handle larger call volume from its customers as well as those of Countrywide Financial, which it acquired last year. But that didn't help Edgar Vash of Falls Church.
Vash said it took him hours to break through Countrywide's recorded message yesterday on an 800-number. The message said Countrywide would contact the borrowers it thinks it can help, Vash said. Undeterred and unwilling to wait, he started calling Countrywide branches.
"I finally spoke to a Countrywide representative and he said 'call back tomorrow' because their systems were down," Vash said. "He couldn't even pull up my data. . . . I'm sweating bullets here. If I can't get through, and at the very least process an application, I could lose my house."
The refinancing portion of the government program is expected to help reduce mortgage payments for up to 5 million homeowners, who can apply through June 2010. It is limited to loans owned or financed by Fannie Mae and Freddie Mac, the mortgage giants seized by the government in September. Owners who have been shut out of the refinancing boom because they have little or no home equity will be able to secure lower rates as long as the first mortgage on their home does not exceed 105 percent of their property's current value and they are current on their mortgage.
"I'm sort of pessimistic about how much of an impact this is going to have because a lot of people struggling probably have loans that aren't Fannie or Freddie," said Eric Gates, a mortgage broker at Apex Home Loans in Bethesda. "If you bought two or three years ago and put zero down or took out a second loan or a jumbo loan, chances are you do not have a Fannie or Freddie loan."
The simplest way for borrowers to figure out what kind of mortgage they have is to call their lender or servicer, the firm that collects their monthly payments. "Whether they can get anyone on the other end of the phone is a different issue," Gates said.
The loan-modification program is limited to loans issued on or before Jan. 1, 2009. It expires in 2012. Under the program, lenders that modify troubled loans are eligible for thousands of dollars in incentive payments, including bonuses for reaching homeowners before they become delinquent. The government will also help subsidize the cost of lowering the borrower's interest rate so that payments are no more than 31 percent of their income. A loan can be modified only once under the program, and borrowers must prove they have a financial hardship.
Under the guidelines released yesterday, the administration will extend the government incentive payments to lenders that use Hope for Homeowners, a government program to refinance troubled borrowers into affordable mortgages that has failed to gain traction. The administration is also developing a program to provide partial payments to holders of second mortgages, known as second liens, to encourage them to extinguish that debt. Treasury officials did not release price tags for either of those efforts.