Administration pushed to expand foreclosure-prevention program
Thursday, February 18, 2010
The Obama administration is facing increasing pressure from lawmakers and housing advocates to retool its troubled mortgage relief program a year after its debut as the housing crisis continues to deepen and spreads to more creditworthy borrowers.
The $75 billion program pays lenders to modify the mortgages of troubled borrowers, typically lowering their payments by about $500 a month.
But so far, fewer than 200,000 borrowers have received a permanent change to their loans, according to Treasury Department data released Wednesday, a small fraction of the 3 to 4 million borrowers who government regulators initially said the program could help before it expires in 2012. That may not bode well for efforts to stabilize the housing market. Credit Suisse has estimated that 3.2 million foreclosures would have to be prevented this year for home prices to rise modestly.
"Clearly the numbers that were discussed by the administration set up an expectation that just don't deal with the reality we're in," said John Courson, president of the Mortgage Bankers Association.
Administration officials have acknowledged that the program, known as Making Home Affordable, got off to a slow start and has yet to reach its full potential. Many lenders didn't begin enrolling borrowers until last summer, months after the program was launched. By then, the primary cause of foreclosures had shifted from the risky mortgages that helped spur the financial crisis to rising unemployment. The latter is tougher to address because jobless borrowers often have little money with which to pay any type of home loan.
Through January, nearly a million borrowers had gotten at least some reduction in their mortgage payments as part of the program, but more than three-quarters have yet to win a permanent modification and must still prove they qualify, according to Treasury data. The program "is doing the job it was designed to do, Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office, said in a statement. "Struggling families are receiving payment relief and the housing market is showing signs of stabilization."
The unemployment factor
But the administration is facing demands to expand the program to help more unemployed borrowers, or to lower the loan balance of underwater borrowers -- those who owe more than their home is worth. Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, has launched an investigation into the program. "While I applaud Treasury's efforts, numerous concerns have been brought to my attention regarding the effectiveness and efficiency of the MHA program and the extent to which it has assisted struggling homeowners," he wrote to Treasury Secretary Timothy F. Geithner earlier this month.
More than half of those who have received mortgage relief so far have said they needed it because they've lost their jobs or had their income drop for some other reason. But many unemployed borrowers can't qualify for help because they don't have enough income. Housing advocates argue that some of the billions of dollars set aside for the loan modification program should be diverted into short-term loans for these borrowers.
And underwater borrowers who have little chance of recouping the lost value of their homes need a more generous program, housing advocates say.
Changes to the program are possible, administration officials have said, but it is unclear how extensive they will be.
No appeals process
Another challenge for borrowers is that the program lacks a formal appeals process for those denied relief, leaving homeowners largely to work out problems on their own.
That has been the challenge for Alice Valentine, a Southeast Washington homeowner who had a decrease in income after a work-related injury. When she first sought a loan modification from Bank of America, she was told she qualified, Valentine said. But the promised forms she needed to fill out never arrived, she said.
"I never received anything in writing from them except for threatening letters," Valentine said. "I have been getting nothing but the runaround."
So she wrote to the White House instead. President Obama responded, offering encouragement. "The road ahead is difficult, but if we move forward resolutely, then I am confident we will overcome this crisis," Obama wrote.
A Bank of America spokeswoman said the bank is following the program's guidelines. "We apologize if there was any miscommunication. We would like to reevaluate her eligibility once her financial situation improves," said spokeswoman Jumana Bauwens.
The program encourages lenders to modify mortgages by offering them a series of incentive payments. But these payments may not be enough to shift the financial calculations made by lenders before offering mortgage relief. "It is clear the incentives being paid are nowhere close to reimbursing the servicers for the cost and expenses that they are devoting to modifications," said Courson of the Mortgage Bankers Association.
'Set up to fail'
Some lenders have sold the loans they made to investors under contracts that restrict modifications. In addition, about 600,000 delinquent borrowers potentially eligible for the program can't apply because their servicers have not signed up, according to Treasury data.
When Yvonne Gipson, 69, applied for relief on the loan for her Annapolis home last year, she was told by her mortgage servicer, PNC, that her loan had been bundled into a security with other loans by Goldman Sachs, she recounted. PNC informed her that the rules governing that security did not allow the loans to be modified, she said.
Instead, wanting to see her catch up, PNC suggested it could raise her monthly payments. The new payments would consume 66 percent of her income, more than double what would be offered under the federal program. "I was being set up to fail," she said. "I am trying to do the right thing. I find the whole thing devastating."
PNC declined to comment and Goldman Sachs said the loan can be modified.
Despite its slow start, the federal program has established industry standards for the types of loan modifications borrowers should receive. So far, borrowers who receive loan modifications under the program are less likely to re-default than those who get help under other mortgage relief programs. About 25 percent of borrowers in the program were delinquent on their new lower payments, according to the Treasury Department, while about half of borrowers in other mortgage relief efforts fall behind again.
But more borrowers in the federal program could re-default later. More than 60,000 of the borrowers who initially enrolled in the program have already failed out.
Part of the problem is that the financial burden on many borrowers extends beyond their primary mortgage to other types of debt. The federal program focuses only on lowering the payments on a primary mortgage to affordable levels, or about 31 percent of income. But even after a modification, many borrowers still have high levels of debt, and federal regulators also want to bring down the payments for second loans, such as home-equity lines. Since announcing the expansion of the program to second liens last April, just one lender, Bank of America, has signed up.