President Bush's decision to drop his opposition to a housing bill that has been pending in Congress for nearly a year cleared the way Wednesday for House approval of a greatly expanded package intended to shore up the shaky real estate market.
But even 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. And with home prices still falling in most parts of the country, some analysts and economists say it will take at least another year before the housing market hits bottom and begins to recover.
The centerpiece of the proposed foreclosure relief effort is a package of federal loan guarantees to help strapped homeowners refinance into market-rate mortgages with better terms than the high-cost loans that are busting their household budgets. Lenders would have to agree to take a substantial loss on the existing loan.
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 individual lenders or loan servicing companies.
As a result, 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.”
The option of refinancing loans at risk of default has been available to lenders since the housing and mortgage meltdown began. Despite government efforts to prod lenders to speed up the process, progress has been slow.
A survey by Moody's Investors Service released last week 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.
Passage of the housing bill has 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. For years, Freddie and Fannie critics complained that the companies weren't carrying enough capital on their books to offset the risks behind their gigantic loan portfolios.
Together, the two government-sponsored agencies own or guarantee more than $5 trillion in mortgages — more than half as much as the entire national debt.
Until now, the government had stopped short of explicitly promising to use taxpayer funds to back Freddie and Fannie. But as investors lost confidence in the two mortgage giants, the Bush administration was forced to step in and propose a rescue plan.
The bill creates a new regulator to oversee Fannie and Freddie with expanded powers, including approval of pay packages for company executives. The bill also raises the size of mortgages the two companies can buy or guarantee to $625,000 from the current $417,000 limit —extending the pool of customers for Freddie- and Famme- backed loans in high-cost housing markets.
To spur home buying, the bill also extends tax credits of up to $7,500 for first-time homebuyers effective from April 9, 2008, to July 1, 2009.
The debate over whether to rein in Fannie and Freddie has been under way for years, but the recent turmoil stepped up the pressure on Congress to act swiftly. Now, after years of languishing, the reform measures in the current housing bill have in some ways overshadowed the original intent of the bill, which was to help homeowners facing foreclosure.
The new oversight of Fannie Mae and Freddie could help maintain a ready supply of affordable mortgage financing for future home buyers.
But the reforms won’t help those with existing loans who face default and foreclosure — 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 Wachovia economist Mark Vitner. “It’s too late for that. There's nothing that can be done.”
Unless foreclosures can be slowed, home prices will likley fall further, according to Federal Reserve Chairman Ben Bernanke.
“The declines in home prices have contributed to the rising tide of foreclosures,” he told a congressional panel last week. “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.”
To help offset that pressure, the bill provides $4 billion in community development grants to help state and local housing agencies in hard hit areas buy and refurbish foreclosed homes, renting them out or reselling them.
That provision had become something of a showdown: Until Wednesday, President Bush had threatened to veto the bill if it included the community grants. Though the veto threat was withdrawn, Treasury Secretary Paulson repeated the complaint Wednesday that the grants were “wasteful.”
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,” said Ali Solis, vice president of public policy for Enterprise Community Partners, a nonprofit group that helps finance affordable housing.
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 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."