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Calls widen for broader foreclosure solutions

The government's Hope Now Alliance says it has helped over a million troubled borrowers head off home foreclosure. But calls are widening for a broader response.
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Launched by the White House in October to head off a rising tide of home foreclosures, the Hope Now Alliance said this week that it has helped over a million troubled borrowers trying to keep their homes. But critics of the program say it’s not clear how many of those homes will be saved over the long run.

Now, with foreclosures still rising, calls for a broader government and industry response are coming from community groups, consumer advocates, members of Congress and, most recently, Federal Reserve Chairman Ben Bernanke.

“It’s mostly a lot of hope and unfortunately not a lot of accomplishment at the moment,” said John Taylor, CEO of the National Community Reinvestment Coalition, which works with community groups to help homeowners. “I think there’s a great deal of exaggeration about what the impact has been. The real measure is: How are the foreclosure rates doing? The truth is the foreclosure numbers continue to rise.”

Fresh evidence of the deteriorating outlook came Thursday in a report showing that mortgage delinquencies - homeowners who are falling behind on their payments - rose to the highest levels in 23 years in the last three months of 2007. Borrowers who are delinquent for more than 30 days risk falling into default, which is the earliest state of the foreclosure process.

Home foreclosures soared to an all-time high in the final quarter of last year, according to the Mortgage Bankers Association.

Falling home prices have also added to the squeeze on borrowers, many of whom are seeing the value of their home dropping below the amount they owe. The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007. As a result, Americans' percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday. That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.

Moody's estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.

That pace of foreclosures is expected to remain high this year as loans issued in 2005 and 2006 continue to reset to higher payments that many borrowers will be unable to afford. Many of these adjustable loans were sold with assurances that the borrower could refinance before the higher “reset” payment kicked in. But with home prices falling, many owe more than their house is worth, eliminating the option of conventional refinancing. If the economy worsens, and more people lose their jobs, that could increase the number of families at risk of losing their homes.

On Monday, Bernanke told a group of community bankers that some 1.5 million subprime mortgages are scheduled to reset from just above 8 percent to about 9.25 percent, raising the average monthly payment by about 10 percent, to $1,500. Conventional 30-year fixed rates are currently at about 6 percent.

“The situation calls for a vigorous response,” said Bernanke.

The Hope Now Alliance said this week that more than a million homeowners have been helped with some form of loan modification or repayment plan. But critics note those statistics don’t indicate how many homes ultimately will be saved from foreclosure. A recent report from the Mortgage Bankers Association of third-quarter foreclosures found that some 40 percent of subprime borrowers who lost their homes previously had succeeded in modifying their loans or negotiating a new payment plan.

“A repayment plan or a one-month deferment when the loan is not affordable really doesn’t do much,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Officials at Hope Now did not return several calls for comment.

Hope Now’s initial success has been in bridging a communications gap between borrowers and lenders. Many homeowners have had a hard time finding reaching someone at their lender with the authority to negotiate a loan modification. For their part, lenders report that some borrowers in trouble have ignored letters and phone calls intended to initiate a discussion about new mortgage terms.

But some consumer groups express concerns that the heavy representation of financial services companies on Hope Now’s board may mean the program is helping lenders more than borrowers. Bernanke has said some lenders need to add more staff to keep up with the rise in delinquencies and loan defaults; Hope Now provides a valuable service to lenders by collecting and assembling information about borrowers in trouble.

But the rising volume of calls fielded by Hope Now staffers has meant that some homeowners may not be getting the in-depth counseling they need to consider all of their options, according to Susan Keating, CEO of the National Foundation for Credit Counseling .

“The fact that the (Hope Now) Alliance secured very broad participation from the mortgage servicer and investor communities but utilized very limited resource from the counseling sector is really very unfortunate,” she said. “Because we’re using very little counseling resources to combat a very large problem.”

Keating says that so far only a handful of the NFCC’s 114 member agencies, with 900 offices around the country, have been tapped to help with the government’s foreclosure prevention program.

“We’re now into March,” she said. “This is not something that we’re seeing on the horizon. We don’t even have an endpoint yet. So why would you be doing this incrementally?”

That counseling is critical because the process of modifying loan terms still faces some thorny problems resulting from the multiple players involved in the financing packages sold at the height of the lending boom. Relatively few lenders held onto individual mortgages or even sold them one at a time to other lenders. That means many homeowners’ point of contact is a so-called “loan servicer” who represents the hundreds of investors who own the securities backed by individual mortgages.

Those servicers are reluctant to reduce a borrower's principal or interest rate for fear of being sued by investors who would see lower returns on their mortgage-backed securities. Though those investors may ultimately lose more if the underlying loans default, it’s impossible to predict just how many mortgages will stop paying. If interest rates fall and the housing market recovers, investors could later argue in court that servicers should have taken a harder line on modifying loans.

Negotiations between homeowners and lenders are also hampered by the widespread use of so-called “piggyback” loans — second mortgages that were used to finance nearly 40 percent of home purchase in 2006. Both lenders in such a case typically need to agree to a loan modification.

But if the total amount of loans outstanding is greater than the value of the house, the first mortgage is paid off first when the home is sold, often leaving the holder of the second mortgage with nothing. So many second mortgage holders figure they have nothing to lose by rejecting modifications and hoping the homeowner figures out how to make their payments long enough for housing prices to recover.

Unfortunately, the ongoing erosion of home equity will likely make matters worse before they get better. Homeowners' percentage of equity slipped to a revised lower 49.6 percent in the second quarter of 2007, according to the Federal Reserve's quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.

The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.

Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.

All of which has some officials calling for more drastic measures.

The most recent came from Bernanke who offered the banker's group tough medicine: He asked them to forgive some of the principal on loans in which homeowners have little or no equity.

“When the mortgage is ‘under water’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,’ said Bernanke. But “temporary palliatives … may only put off foreclosure and perhaps increase the ultimate costs.”

Another idea, championed by Sheila Bair, Chairman of the Federal Deposit Insurance Corp., would involve an across-the-broad freeze on interest rates that are scheduled to jump to above-market rates and create unsustainable monthly payments. She has criticized temporary loan modifications as “kicking the can down the road” if they don’t provide long-term solutions.

Congress recently expanded the borrowing limits for government-sponsored agencies Fannie Mae and Freddie Mac to provide more capital to the mortgage markets. But those measures won’t help existing homeowners with too little home equity to qualify for a conventional refinancing.

Others have suggested creating a new agency — similar to the Resolution Trust Corp. created after the savings and loan collapse of the 1980s, or the Depression-era Home Owners' Loan Corp. that bought out troubled loans from lenders and replaced them with new, more affordable loans for borrowers.

So far, political opposition to a “bailout” has prevented broad government intervention. Last week, Treasury Secretary Hank Paulson repeated the White House’s opposition to using taxpayer dollars to provide relief, saying lenders should be allowed time to work out solutions on their own. But even if the political wind shifts soon, relief probably won’t come soon enough for hundreds of thousands of homeowners.

“It's too late to try to create a new agency, and then build it, staff it up, train the staff appropriate for it and try to address this,” said Taylor. “That’s going to take a year. We don’t have another year of 200,000 foreclosures a month."

That, he said, is a "guarantee" for a recession.

All of these proposals face a fundamental hurdle: the backlash from homeowners who are struggling but still keeping up with their payments. With no standard guidelines for who qualifies for a break on their loans, home buyers who didn’t get in over their heads will want to know why they can’t get a break from their lender too.

"The challenge comes in when the existing homeowners are performing and they want similar reduction in loan amounts and feel punished for making their payments,” said Michael Zoretich, vice president of CK Mortgage, a mortgage brokerage in Brookings, Ore. “They may view the failing borrower as receiving rewards not offered to them.”