DURING HIS Twitter Town Hall on Wednesday, President Obama conceded that his administration’s efforts to halt the tide of home foreclosures have been less than satisfactory. “We’ve had to revamp our housing program several times to try to help people stay in their homes and try to start lifting home values up,” he noted. “But of all the things we’ve done, that’s probably been the area that’s been most stubborn to us trying to solve the problem.”
Sad, but true. The president’s most ambitious loan restructuring effort, the Home Affordable Modification Program, has produced about 730,000 permanent revised mortgages, about a fifth of what the administration initially promised. Attractive in theory, the president’s goal of maximizing loan modifications at minimum cost to taxpayers has proven difficult. The president sought to target borrowers at risk of default who could avoid it with a bit of aid. Alas, it’s nearly impossible to identify such a group in advance.
Lender resistance and disorganization compounded the problem, but it has also become clear that the fundamental issue is not the structure of loans. It is joblessness that drives foreclosures now — and that may continue for some time, if Friday’s disappointing unemployment figures are any indication. Borrowers who have lost their jobs often can’t keep up their house payments no matter how much banks reduce them.
Undaunted, the president is trying again. His latest foreclosure reduction effort focuses on the connection between unemployment and mortgage default. As described Thursday by Housing and Urban Development Secretary Shaun Donovan, the plan will require lenders whose loans are insured by the Federal Housing Administration to give 12 months of mortgage forbearance to unemployed homeowners — as opposed to four months under current rules. The FHA insures 14 percent of all active mortgages. The plan would encourage servicers outside of the FHA program to offer similar forbearance to unemployed borrowers in their loan modification programs.
Like all other mortgage aid concepts, this one includes an element of moral hazard. Importantly, though, it would postpone principal and interest payments — not cancel or even reduce them. Borrowers would still have to pay arrears once they’ve returned to work. That minimizes incentives to game the system.
No one has a panacea for foreclosures; even if it works perfectly, the administration’s latest plan would probably prevent only a few tens of thousands of foreclosures, which is a relative handful of the million forecast for 2011. Nor would it be desirable to prevent unavoidable foreclosures, because the housing market needs to find a bottom and foreclosures are part of that necessary process. Yet there is a role for government in preventing avoidable foreclosures and putting the brakes on market free-fall. At least this time, government may be focusing its assistance where it is likeliest to have an impact.