Obama administration revises anti-foreclosure strategy
Saturday, March 27, 2010
The Obama administration Friday tried to manage expectations about its newest foreclosure-prevention efforts, while consumer advocates and others who track the housing market praised the initiative but questioned whether it would succeed in curtailing the foreclosure epidemic.
The initiative, announced Friday, expands on the government's marquee foreclosure prevention program, Making Home Affordable. That program was originally expected to reach as many as 4 million borrowers, but it is not on track to help so many.
To reach its goal, the administration is adding tools to help lenders reach struggling borrowers who have lost their jobs or who are "underwater" because home values have plunged and they now owe more than their homes are worth.
In a briefing with reporters Friday, administration officials said the new efforts are not designed to help all troubled borrowers, but rather those who stand the best chance of recovering. That approach, they said, should help further stabilize the housing market and the economy at large.
"We're not going to stop every foreclosure. It wouldn't be fair. It would be too expensive, and it probably wouldn't succeed anyway," said Diana Ferrell, deputy director of the National Economic Council, which advises the president.
The administration's plan, to be implemented over several months, requires lenders to slash jobless borrowers' payments for three to six months, adopting a strategy used by the industry and applying it more broadly.
"The banks simply haven't been doing it as much as they should," said Rep. Barney Frank (D-Mass.), a longtime supporter of this approach. "The unemployed are fully deserving of this help."
Many housing advocates said they appreciated the administration's effort. But some were disappointed that parts hinge on lenders' voluntary participation.
To help underwater homeowners, lenders will be asked to reduce the principal owed on a loan if the amount exceeds the value of the home by 15 percent or more. The reduced amount would be set aside and forgiven by the lender over three years if the borrower keeps up with monthly payments.
John Taylor, chief executive of the National Community Reinvestment Coalition, said he would have preferred that the administration mandate principal forgiveness as a first step.
"I will be pleasantly shocked if investors step up for half a million borrowers," Taylor said.
But other housing experts said the government's support of principal reductions marks a significant shift from the past, when the administration feared that doing so would encourage borrowers to stop paying their loans. Now, it is backing the tactic and offering financial incentives for the first time to lenders who reduce loan principal.
"My sense is, this will change the calculus and make a difference," said Mark Zandi, chief economist at Moody'sEconomy.com. "Every lender on the planet will now be compelled to do the math."
Lenders are not forced to lower the loan debt, but they will be required to run calculations to determine whether doing so would yield the best financial return for the investors who hold the mortgages, said Julia Gordon, senior policy counsel at the Center for Responsible Lending.
In some cases, reducing the principal might be more advantageous to investors than foreclosure or common loan-modification methods, such as cutting the interest rate, Gordon said.
Of most interest to institutional investors is a new program at the Federal Housing Administration, which will help underwater borrowers who are on time with their payments refinance into cheaper FHA-backed loans. The FHA will offer incentives to lenders that reduce the amount borrowers owe by at least 10 percent.
This approach is similar to one embraced by another FHA program, launched in late 2008, which managed to refinance only 35 borrowers instead of the 400,000 originally expected.
But the new program differs from the old one, said Tom Deutsch, executive director of the American Securitization Forum.
Under the old program, if a borrower had a second mortgage on a home, that mortgage would have to be terminated for the homeowner to refinance, Deutsch said. The financial incentives offered by the government at the time were not strong enough to entice banks to do that.
The new FHA program will double the amount paid to lenders that help modify second loans and allow those second mortgages to continue. The two loans combined cannot exceed the current value of the home by more than 15 percent once the first loan is refinanced. Allowing the borrower to remain slightly underwater would be a change from the old program, which was limited to borrowers who had some equity in their homes.
"The investor community is hopeful that tens of thousands of loans could go through this program," Deutsch said. It is unlikely to attract many more than that because it is limited to borrowers who have 31 percent or less of their pretax income available for their monthly mortgages. Few underwater borrowers can meet that requirement, he said.
FHA Commissioner David H. Stevens agreed. "I would not overstate by any stretch expectations that this is going to be a huge program in the investor community," he said.