Whittled-down housing bill leaves loan decisions up to banks, investors
By John W. Schoen
updated 7:36 a.m. PT, Thurs., May 21, 2009
More than two years year after the housing market tanked and the foreclosure rate began rising, the ongoing wave of distressed home sales is weighing on house prices and crimping a long-awaited economic recovery.
On Wednesday, President Obama signed off on the government’s latest response to the crisis, a whittled-down bill aimed at helping millions of struggling borrowers keep their homes. But the latest effort may not be strong enough to reverse the downward spiral that has gripped the housing market and the economy.
After months of debate, the final version of the latest bill eliminated a key provision that would have allowed bankruptcy judges to modify mortgage terms. Faced with heavy pressure from the banking industry, Congress again tabled the highly contentious provision after several attempts to introduce it over the past year. That leaves the decision to refinance a mortgage up to lenders and investors holding securities backed by those loans.
Meanwhile, homeowners stuck with unaffordable payments, or who now owe more than their house is worth, must slog through the red tape of negotiating a new loan with their lender.
Courtney Scott, 60, a retired nurse living in Atlanta, has been trying for over a year to get her loan modified.
“This has just been round and round,” she said. “Every time we do what they say they need us to do, something happens where we need to resubmit it or they say there’s a backlog and it’s going to take more time.”
That backlog is growing as the pace of foreclosures rise. They’re up 32 percent in April from a year ago, according to the real estate data firm RealtyTrac. Some 2.4 million new home foreclosures are expected this year, according to the Center on Responsible Lending. Nearly one in five homeowners is already “underwater” — owing more on their mortgage than their home is worth, according Moody’s. While pace of job losses has begun to slow, unemployment is still headed higher.
“You mix all of that together, and the foreclosure problem is getting worse not better,” said Mark Zandi, chief economist at Moody’s Economy.com. “We’re counting on the president’s loan modification plan to really kick in here. But it hasn’t yet, and we need to see it.”
Meanwhile, the rise in foreclosures is tearing a hole in the household budgets of those that lose their homes and those who live next door. As homes are sold off at distressed prices, the value of neighboring homes also drops.
Though home sales have perked up this spring, in some markets as many as half of those are distressed sales to new home buyers and investors looking for bargains.
“We need the foreclosure supply to start slowing down,” said Susan Wachter, a real estate professor at the Wharton School of Business. “As we get more homes through the foreclosure process, housing prices continue to fall.”
The government’s foreclosure relief effort is beginning to show signs of progress. The Making Home Affordable program, for example, gives cash incentives to lenders who provide foreclosure relief. In the first two months, some 55,000 homeowners were offered more affordable terms, according to the Treasury.
“We’re encouraged but we are not by any stretch convinced,” said John Taylor, president of the National Community Reinvestment Coalition, which has been working with Congress on various foreclosure relief proposals.
Since the foreclosure rate began rising in the middle of 2006, the government has made several attempts to slow the ongoing erosion of homeownership. In October 2007, the Bush administration launched the Hope Now Alliance, a public-private partnership designed to encourage lenders to rewrite loan terms to make payments more affordable.
Though the group says nearly a million mortgages were reworked, many of those “workouts” simply added missed payments to the outstanding principal, raised the monthly payment and made the new loan even less afforadble. As a result, more than half of homeowners who got help defaulted on their new loans in less than a year.
The latest effort centers on providing incentives to loan servicers — the companies who collect payments from homeowners on behalf of investors who jointly own the mortgage — to provide more affordable terms. The Making Home Affordable program, for example, offers incentives to lenders who lower monthly payments by either reducing the interest rate or stretching out the term to 40 years. The program applies to loans issued or sold to investors through Freddie Mac or Fannie Mae and the Treasury estimates it could help as many as five million homeowners.
The latest foreclosure bill expands on that effort and provides further help for lenders who offer troubled homeowners more affordable loans. One key provision protects servicers from lawsuits by investors holding bonds backed by loans that are modified. In many cases, lower mortgage payments bring lower returns for those investors; servicers say that has stymied past efforts to modify loans.
Another provision overhauls the Hope for Homeowners program. Introduced last summer, the program was intended to help some 400,000 borrowers. But high fees and tight credit left all but a handful of homeowners with new loans and lower monthly payments.
Foreclosure relief efforts have also been hampered as servicing companies have been overwhelmed by calls from homeowners seeking help. Originally hired to collect payments and forward them to investors, servicers say they aren’t set up to handle the historic wave of defaults created by the housing market collapse. Cash incentives for loan modifications are designed to help defray those costs. But many servicers remain badly understaffed.
“You talk to a machine, talk to someone in a foreign country,” said Taylor. “More often than not you never get the same person. So you’re constantly starting from scratch. I do think there is an industry infrastructure problem.”
Scott’s attempt to modify her loan typifies the process. When she bought her Atlanta-area home two years ago, she applied for an FHA mortgage through a state-sponsored program. Bank of America approved her application for a $65,000 loan — about half the home’s current value — but the payments are consuming nearly 70 percent of her fixed income, she said.
After contacting the bank in March, 2008, she was told there was nothing the bank could do until she was behind in her payments, she said. So she stopped paying. After she recently began working with a HUD-approved credit counselor, she said the bank told her she had to make up two of those missed payments before they would talk to her. Two months ago, the counselor helped Scott apply for a loan modification, but the bank has not yet assigned someone to her case.
“They lost the paper work and asked that it be resubmitted,” she said. “So then we had to start from scratch, resubmitting all the documents.”
A Bank of America representative said the company does not comment on individual customers’ financial details but that it is reviewing Scott’s case.
Like other lenders who are participating in the government foreclosure relief programs, Bank of American also faces a hurdle when it tries to modify loans that aren’t held in its portfolio or were packaged and sold to investors outside of Fannie Mae and Freddie Mac.
Because those mortgages were pooled and sold off to hundreds of investors — each of which have varying financial interests in the loan pool — modifying those mortgages means getting those investors to sign off on the loan. Loan servicers say they’ve been hampered in their efforts to provide more affordable terms because of the threat of lawsuits from investors who might get a lower return on the new loan.
To help break that logjam, the foreclosure relief bill includes a so-called “safe harbor” provision that would shield lenders and servicers from lawsuits if they follow government guidelines when modifying loans.
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