The White House said Friday a much-anticipated plan to help struggling homeowners will be announced by President Obama in a speech Wednesday in Arizona. In the interim, banking giants Citibank and J.P Morgan said they would halt new foreclosures on owner-occupied home loans through March 6.
The administration is working on a comprehensive plan to try to halt the ongoing wave of home foreclosures as part of its efforts to stabilize the financial system. The $50 billion package may include a program to buy up distressed mortgages at discount prices, subsidies to help struggling homeowners make their monthly payments and national standards for modifying home loans to more affordable terms.
The foreclosure prevention plan is part of a broader package of measures the administration is putting in place to help the staggering economy. Congress is moving toward final passage of the economic stimulus legislation. The Treasury Department has outlined in broad terms a plan to help stabilize the nation's financial sector.
Government-controlled mortgage finance companies Fannie Mae and Freddie Mac suspended foreclosure sales during the winter holidays and have halted evictions from foreclosed properties until next month. Earlier this week, the Office of Thrift Supervision urged the more than 800 thrift institutions nationwide — which hold roughly a half-trillion dollars in mortgages — to do the same.
Treasury Secretary Timothy Geithner, Housing and Urban Development Secretary Shaun Donovan and other Obama administration officials held a series of meetings this week Wednesday with top bankers, community groups and financial industry representatives to discuss the plan.
So far, government efforts to prevent foreclosures have focused on pressing the lending industry to work with at-risk homeowners voluntarily and provide them with more affordable payment terms. But the new proposal signals a shift to a more direct government approach.
The foreclosure prevention package is expected to contain a number of measures designed to work in concert. One proposal would draw on $50 billion in funds already approved for the financial bailout to buy up millions of mortgages at a discount.
A $300,000 mortgage on a house now worth $200,000, for example, might be bought at a 30 percent discount. The homeowner then would be able to refinance the smaller mortgage with lower monthly payments. The government could then sell the loan back to investors, freeing money to buy more loans.
Of the roughly 10 million to 12 million households facing foreclosure over the next four years, the buyback plan could help between 4 million to 5 million to keep their homes, according to John Taylor, president of the National Community Reinvestment Coalition, who met this week with White House officials to discuss the plan.
White House officials have stressed the urgency of acting to shore up the nation’s banking system to avert a potential “catastrophe.” But slowing the pace of foreclosures is essential to reducing the glut of homes on the market and resolving the crisis, according to Columbia University economics professor Christopher Mayer.
“We've got to deal with housing,” he said, ”because, look, if housing drops another 20 to 25 percent, I can promise you a lot more of these mortgages are going bad, and we're going to have a much bigger problem.”
Some 275,000 foreclosure filings were reported in January — or about one in 466 households — an 18 percent increase over January 2008, according to data released by RealtyTrac Thursday.
To date, industry efforts to halt the pace of foreclosures have proved inadequate. According to the Office of the Comptroller of the Currency, more than half of the 287,755 mortgage workouts in the third quarter of 2008 involved repayment plans that, in many cases, increased the monthly cost of the loan to make up for missed payments. That’s one reason more than half of borrowers who had worked out new mortgage terms redefault within six months, according to the OCC, which regulates nationally charted banks.
For the past two years, Congress has considered a number of proposals to try to keep struggling homeowners in their homes. Much of the debate has centered on how much taxpayer money — if any — should be applied to the problem. That debate continues to slow progress on adopting these proposals.
Some longstanding proposals have advancing slowly through Congress. One of those would overhaul the Hope for Homeowners program Congress set up last year with the goal of helping more than 400,000 homeowners swap unaffordable adjustable mortgages for 30-year loans with fixed rates. Tight restrictions and high fees left that program out of reach for all but 25 homeowners who have been approved to date.
The White House foreclosure package is also expected to try to break the logjam at the heart of the problem homeowners face trying to modify their mortgage to more affordable terms: the enormous legal complexity created when trillions of dollars worth of mortgages were bundled into pools and sold off to investors. Loan servicing companies — originally hired to collect payments from homeowners and distribute them to investors — have been slow to respond to modification requests, in part because they fear being sued by investors.
Under a program overseen by Federal Deposit Insurance Corp. Chairwoman Sheila Bair, standard guidelines were developed to speed the modification of mortgages held by the failed IndyMac Bank, which the government seized last year. The program also provides financial incentives to servicers to modify loans and gives them legal protection if they follow certain standard guidelines.
Both the Treasury and the Federal Reserve also have been exploring ways to make mortgages more affordable to help stimulate demand for housing.
By far the most controversial proposal to break the loan modification logjam would change bankruptcy law to allow judges to modify loans from the bench — as they’re able to do for all other forms of consumer debt. This so-called “cramdown” idea has been floated several times since the crisis began but has been vigorously opposed by the financial services industry.
Lenders argue they would have to charge higher rates to offset the increased risk that a judge would forgive part of a loan in bankruptcy court. Proponents counter that the risk is no higher than for any other form of secured credit subject to modification, and that any increased borrowing cost would be relatively small.
But the proposal is getting another look. On Tuesday, Geithner told Congress changes in the bankruptcy law “will be an important part of the president's plan."
“At that same time, we want to do it very, very carefully,” Geithner testified, “because this is a delicate situation, complicated balance. And we want to make sure we're not making the process worse as we go forward.”