Chadi Moussa lives in a house valued at more than $1 million in Dublin, Calif., in the desirable East Bay area. Unfortunately, he owes nearly twice that much on his mortgage. Mr. Moussa, who runs a used luxury car dealership, is by any definition a troubled homeowner.
After refinancing twice, Mark Klepper owes $1,064,000 on the Miami house he bought for $585,000 five years ago.
But when he looked at President Obama’s housing rescue plan, he saw nothing for him because his mortgage was too high.
“You give $25 billion to a bank, at least they should help people stay in their homes,” Mr. Moussa said. “But once you get to big loans, nobody’s doing anything about it.”
Administration officials say the plan, the details of which were released Wednesday, is intended to help as many homeowners as possible and could prevent three million to four million foreclosures through loan modifications and help four million to five million through low-cost refinancing.
But it does little for borrowers who have had significant jolts to their income, or who owe more than their home’s value on loans that exceed $729,750. In boom-and-bust housing markets like Florida, Las Vegas, Phoenix or California, where values have fallen 30 percent to 40 percent, the plan leaves many in homes they cannot afford — some because they borrowed recklessly, others because they were buffeted by the market swings.
About 20 percent of the country’s 50 million mortgage holders owe more than 105 percent of their house’s value, and so do not qualify for refinancing under the plan, according to J.P. Morgan.
“The refinance portion of the plan is set up so it provides the least help for the people who need it most,” said Christopher J. Mayer, a professor of real estate at the Columbia Business School. “We’re missing an opportunity to help many more Americans.”
Refinancing is only for loans owned or backed by Fannie Mae and Freddie Mac, or roughly half of all homes. Homeowners can tell whether the agencies back their loan by calling their mortgage companies.
For other borrowers, the government plan subsidizes lenders who modify loan payments, but only on loans below $729,750.
Mr. Moussa missed out on both counts.
The Treasury Department estimates that 2 percent of mortgages exceed these limits; the figure approaches 6 percent in California.
“The program made choices,” said Bill Apgar, a senior adviser at the Department of Housing and Urban Development. “In order to have the resources available to help the most people, it was decided to put limits on the help to the folks who have better than average capacity to adjust.” The planners expect 20 percent to 30 percent of people who receive modifications to default again, which is about half the rate for previous loan modifications.
Homeowners with more modest mortgages may also fall through the cracks. Tracy Frazier, 33, has a first mortgage of $325,000 on his house in Phoenix. But the county recorder valued it at $177,000, making him ineligible for refinancing and unlikely to get a loan modification because he is a poor risk.
“The situation we’re in, it stinks,” said Mr. Frazier, whose income has fallen to $42,000 from $80,000. “But I want to keep this home. Why get us out of it? If it goes to auction, you’ll get half the value.”
J.P. Morgan estimates that the loan modification plan will prevent 600,000 to 2.6 million foreclosures, depending on how liberally banks modify mortgages and how many borrowers default again.
Paul Willen, a senior economic adviser at the Federal Reserve Bank of Boston, cited another group not helped by the plan: the newly unemployed.
“Cutting my payment by 20 percent isn’t going to help me if I have no income,” Mr. Willen said. “And often these people have gotten a new job offer but they can’t move because their house is under water.”
Because house prices often stay low even after the economy recovers, he said, high foreclosure rates are likely to continue after the banks and employment stabilize.
Even with refinancing and loan modifications, many borrowers will still end up in foreclosure, said Christopher A. Viale, president of the Cambridge Credit Counseling Corporation, a nonprofit agency in Agawam, Mass.
“There’s 10 million households that aren’t being talked about, and they aren’t going to be helped at all,” Mr. Viale said. “They aren’t behind on their mortgages, but they’re putting everything on their credit cards, they’re making minimum payments and paying penalty rates, and there’s no way they can pay off the interest.”
In the past, these homeowners might have refinanced their homes to pay down this debt, but that is no longer an option. “They need reductions of 30 or 40 percent” on their mortgage payments, Mr. Viale said.
For Mr. Moussa, the road toward foreclosure has been precipitous. He bought his home in 2005 for $2.24 million, with a down payment of more than $500,000, and monthly payments of $4,000 for the first year. But as California real estate prices plummeted, his house’s value fell to about $1.1 million, he said. Then his income dropped by half.
After he defaulted on his mortgage five months ago, Mr. Moussa said he asked his lender, Countrywide Financial, to change the term of his loan to 40 years and to lower the interest to 4 percent until the car business revived.
“Two days ago I got the answer that at this point they can’t do anything,” he said.
Mr. Moussa now has monthly mortgage payments of $8,700 and a home that may never recover its equity. The stress has eroded his marriage, and his wife and daughter are now with her family in Beirut.
His frustration was evident in his voice. “I can make $5,000 payments per month. Why not do that for me for a couple years? Why take it away, sell it” for a huge loss, he asked. “In my area, half the houses are in foreclosure or short sales. And some of them have been stripped down, everything torn out.”
The president has called for legislation empowering bankruptcy court judges to lower the principal on mortgages to reflect fallen home values. This legislation has met strong resistance from the lending industry and many lawmakers.
For Mark Klepper, 50, who lives in Miami, buying a big house was a way to establish credit to start a business. In 2004 he bought a home for $585,000, and watched its value rise to $1.4 million. After refinancing twice, he owes $1,064,000. But the home is now worth a little more than he paid for it, and his income has fallen by 40 percent. He stopped paying his mortgage in January. If he were to continue paying, he said, the drain would crush his business. The government’s plan does not help him.
“I feel if there’s a plan out there, there shouldn’t be a limit,” Mr. Klepper said. “If the government is helping these lenders, they need to take some principal write-downs.”
He asked his lender to reduce his balance to $600,000 and his rate to 4 percent, but so far has made no headway.
“I’m saying I can afford to pay, just not what I did in the past,” he said. “I wouldn’t be asking for it if everything was fine, but it’s not.”
