Three years after the housing bust sent foreclosures rates soaring, the White House has gone back to the drawing board to try to keep another 8 million homeowners in their homes.
But a series of enhancements to the Obama administration's year-old foreclosure relief plan announced Friday does little to attack the fundamental logjams that have plagued a program designed to modify loans to create more affordable payments.
As a result, the latest changes likely will help relatively few borrowers, according to those briefed on the program.
“We continue to tinker around the edges of foreclosure prevention,” said John Taylor, president of the National Community Reinvestment Coalition, who testified Thursday on Capitol Hill about the program’s failings.
“We rush to give banks tax breaks, but we dawdle to help homeowners who through no fault of their own lost their jobs because of the economic crisis or bought defective loans that caused the economic crisis.”
When the pace of U.S. foreclosures began rising in 2007, the hardest hit were borrowers who had been sold subprime loans that reset to unaffordable levels. As the housing market cratered and the recession deepened, the problem spread to other groups, including those who lost their jobs or saw the value of their homes fall below what they owed on their mortgage.
The changes announced Friday are intended to help those groups. Lenders and mortgage servicers will be required to offer three to six months of temporary relief for borrowers who have lost their jobs.
Mortgage companies participating in the existing Home Affordable Modification Program (HAMP), also will be required to consider cutting the amount borrowers owe, for which they would be paid an incentive from the $75 billion set aside to fund the HAMP program. "They’re trying,” said Helen Raynaud, vice president of national grants for the National Foundation for Credit Counseling. “But a lot of the aspects are still voluntary for the servicers to participate."
Additional incentives are being offered to lenders and servicers that cut payments or eliminate second mortgages — a key roadblock in many loan modifications. But unless lenders and servicers suddenly increase the pace of loan modifications, the cost of those incentives will likely remain small. So far, the government has paid out only about $50 million under the HAMP program.
After the Bush administration’s first foreclosure relief plan, Hope Now, failed to make a dent in the rising foreclosure rate, the Obama administration a year ago announced the HAMP program to try to head off the widening crisis. The plan originally was expected to save between 3 million and 4 million homes. So far, of 1.1 million homeowners who have signed up, only 170,000 have won permanent loan modifications.
To be sure, the latest changes will help boost that number. But those who have looked at the new guidelines say the numbers helped likely will still be counted in the hundreds of thousands. As many as 8 million homeowners are at risk of losing their homes in the next two years.
"We remain dubious about government mortgage modification efforts," wrote Jaret Seiberg, an analyst with Concept Capital's Washington Research Group. "So far none have lived up to expectations, and we see little reason to believe the latest effort will turn out any different."
Part of the problem lies with the scope of the crisis. Three years after the housing bubble burst, the number of homeowners falling behind on their mortgages continues to rise. On Thursday, U.S. banking regulators reported that the number of seriously delinquent mortgages jumped in the fourth quarter, led by a sharp increase among the most creditworthy borrowers.
Some 13.6 percent of all homeowners with mortgages — more than one in seven — are behind in their payments, according to the Office of the Comptroller of the Currency. It was the seventh consecutive quarterly rise.
Meanwhile, millions of homeowners who were sold “pay-option” adjustable mortgages during the housing boom face the prospect of big jumps in monthly payments this year and next. Millions more are “underwater,” owing more than their home is worth.
The mortgage mess remains mired in the complex financial innovation that created the hundreds of billions of dollars of mortgage-backed bonds that financed the housing bubble. That has created an equally complex quagmire of multiple investors holding pieces of an individual homeowner's mortgage. Disagreements over how to value those investments, and how and when to book losses, have stymied the process from the beginning.
“We have to do a real reality check,” said David Berenbaum, chief program officer at the NCRC. “Until we address the underlying problems with this paper — who holds it, how it was originated, how people are accountable and how we can correct this epidemic of foreclosures — our communities' tax base, as well as the economic climate of the nation, is at risk.”
Rising unemployment has also expanded the crisis to a pool of borrowers who were once among the most creditworthy. But one of the nasty side effects of the loan modification has been that homeowners who see their payments reduced below the original amount can see their credit scores lowered.
“That can hurt them when they go looking for a job,” said Raynaud. “When you get a job offer, employers are looking at credit scores.”
It’s not clear whether Friday’s announcement addresses that problem, said Raynaud.
Homeowners who have applied for help with their mortgages report a blizzard of red tape when trying to deal with lenders and servicers. Many servicers have acknowledged the problem, but argue that they were never set up to deal with the historic wave of defaults and foreclosures.
But three years after the housing bust began, homeowners and housing counselors report that the process involves endless delays on hold, repeated redirection from one department to another, delayed or no response, lost paperwork and little or no explanations when applications are denied.
“These problems have not really been addressed yet,” said Raynaud “I have not heard from any counselors that it’s getting better.”
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