After a year of debate, Congress appears close to passing a bill intended to stem the rising tide of home foreclosures and stabilize the shaky housing market.
But even if the bill wins final passage — far from a certainty — the most optimistic forecasts suggest it would help only about 400,000 of the estimated 3 million homeowners who will likely lose their homes in the next year.
Prospects for the bill have been complicated by the mortgage meltdown's latest chapter — the severe turmoil surrounding Fannie Mae and Freddie Mac, the government-sponsored companies that provide much of the capital to the mortgage market. A Bush administration plan to help prop up the two faltering enterprises has been tacked on to the housing bill, generating some backlash from congressional Republicans.
Federal Reserve Chairman Ben Bernanke warned this week that the ongoing housing crisis is having a serious ripple effect.
“The declines in home prices have contributed to the rising tide of foreclosures,” Bernanke told a congressional panel. “By adding to the stock of vacant homes for sale, these foreclosures have in turn intensified the downward pressure on home prices in some areas.”
One major hurdle to passage of the bill is a proposed $4 billion in community development grants to help agencies in hard hit areas to buy and refurbish foreclosed homes, renting them out or reselling them.
The debate over the provision has become something of a showdown. President Bush has threatened to veto the bill if it includes the community grants, while House supporters have vowed to keep it in the final bill, which is expected to come to a vote early next week.
Opponents say using tax dollars to buy foreclosed homes amounts to a bailout for lenders; proponents argue that the funds would create new jobs and help stem the slide in home price where foreclosure rates are highest.
“The real losers in this awful crisis are the residents who live next to the foreclosed property who have continued to pay their mortgages on time yet see their property values rapidly decreasing,” Ali Solis, vice president of public policy for Enterprise Community Partners, a non-profit group that helps finance affordable housing.
The centerpiece of the proposed foreclosure relief effort is $300 billion in federal loan guarantees to help homeowners refinance into mortgages with better terms. But attorneys, housing counselors and others working with strapped homeowners say the proposal falls short because it leaves the decision to modify a loan up to the lender or loan servicing company.
That means the housing bill will have “little or no impact on the number of foreclosures,” according to O. Max Gardner III, a Shelby, N.C. bankruptcy attorney who works with homeowners who are trying to modify their mortgages.
“I just don’t think the bill addresses the core problem,” he said. “You have so many servicers representing so many different interests with each (mortgage pool) to some extent having different guidelines on loan modifications.”
Despite government efforts to prod lenders to speed up the process of reworking bad loans, progress has been slow.
A survey by Moody's Investors Service released Monday found that as of March loan servicers had modified less than 10 percent of the subprime loans with interest rate resets — up from 3.5 percent in December. Some homeowners report that their modified loan came with higher monthly payments, offering little long-term relief.
The survey found that about 40 percent of the loans modified in the first half of 2007 were 90 or more days delinquent as of the end of March.
A weakening economy, along with rising prices for food, energy and other household expenses, has expanded the pool of homeowners at risk of default. Some who might otherwise be able to keep up with their payments are falling behind as job loss or major health expense depletes their savings or retirement funds.
“The crisis is not getting better, the crisis is getting more severe,” said Susan Keating, the president of the National Foundation for Credit Counseling, which works with local agencies helping cash-strapped families. “And the tentacles of the problems are much more far-reaching than any of us would have considered 18 months ago.”
While the initial rounds of mortgage defaults and foreclosures were concentrated on the lower end of the economic ladder, the problem is now hitting families with higher incomes. Gardner says he’s seeing a big increase in bankruptcy filings from wealthier clients.
“From predominantly hourly employees all the way up to doctors, lawyers, insurance agents, people that were involved in the banking mortgage and real estate business,” he said. “It’s just been a massive upward movement on the income scale.”
For some homeowners, no amount of government help will head off a foreclosure. That includes many in states with the highest concentrations of mortgage defaults, such as California, Florida, Arizona and Nevada. In those states up to 40 percent of buyers in recent years were buying the homes as investments, according to Wachovia economist Mark Vitner.
“These investors never thought they’d have to make any mortgage payments. They thought they’d flip it,” he said. “These investors have no money. They have nothing. They used credit cards to make the down payment.”
Other homeowners facing default simply bought more house than they could afford, sometimes based on the advice of a real estate agent or mortgage broker.
With so many different factors behind the rise in foreclosures, the extended debate over the housing bill has brought wide disagreement about appropriate solutions.
Opponents of government relief maintain that borrowers willingly took on debts they knew — or should have known — they couldn’t afford. But as state and federal investigators have brought thousands of cases of mortgage fraud in the past year, the role of mortgage brokers and lenders has gotten more attention.
Bernanke, in announcing new mortgage rules this week, said many borrowers had been victimized by "unfair or deceptive acts and practices by lenders."
Among other provisions, the new Fed regulations require mortgage brokers and lenders to verify that a borrower can afford the mortgage and fully understands the terms. The rules also bar lenders from locking home buyers into bad loans by applying unaffordable pre-payment penalties.
While much of the early debate on the housing bill centered on whether the government should “bail out” borrowers and lenders who got in trouble, the debate has shifted with the collapse of Bear Stearns in March and the problems faced by Fannie Mae and Freddie Mac
Critics of the two companies have long voiced concerns that, with a combined $5 trillion in mortgages and mortgage-backed bonds, Fannie Mae and Freddie Mac had grown too fast and hold too little capital to weather a severe downturn.
The White House's proposed reforms could help maintain a ready supply of affordable mortgage financing for future home buyers. But they won’t help those with existing loans who face default. Or their neighbors who are seeing their home’s value decline.
“It’s not going to speed up or lessen the impact of the correction of the housing market,” said Vitner. “It’s too late for that. There's nothing that can be done.”