Multibillion-Dollar Plan Aims to Help Modify Mortgages
By Michael A. Fletcher and Renae Merle
Washington Post Staff Writers
Thursday, February 19, 2009
MESA, Ariz., Feb. 18 -- President Obama unveiled a foreclosure-prevention package Wednesday that would pour more than $75 billion into arresting one of the root causes of the nation's economic spiral by helping as many as 9 million homeowners obtain more affordable mortgage terms.
The package, part of the Obama administration's multibillion-dollar effort to jolt the nation out of its deepening recession, goes beyond what some analysts had expected and was welcomed by many of the nation's top lending institutions. But it also drew criticism from some housing experts and consumer advocates, who argued that it does not go far enough in addressing some critical aspects of the foreclosure crisis. Many key details of the plan will not be released until early next month.
Speaking to a crowd packed into a high school gymnasium here, Obama said the mortgage plan would help all Americans confronted with rapidly eroding property values by helping those in danger of losing their homes.
"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly, by refinancing loans for millions of families in traditional mortgages who are underwater or close to it," he said.
The three key elements of the proposal include a program that would allow 4 million to 5 million homeowners with little equity in their homes to refinance into cheaper mortgages; a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and a doubling of the government's commitment to Fannie Mae and Freddie Mac to $400 billion.
It is the largest federal foreclosure-prevention package in decades, and it would rely on a series of incentives to jump-start fledgling efforts to keep millions of distressed borrowers in their homes. It is the first major government program aimed at homeowners who are current on their loans, and it would require large banks that have received government bailout money to abide by industry standards for loan modifications established by the Obama administration.
About one in 10 homeowners were delinquent on their mortgages late last year, and as many as 6 million homes could go into foreclosure during the next three years without this program, said Shaun Donovan, secretary of housing and urban development, adding: "We believe we can help a very large share of these."
The administration estimates that simply by reducing foreclosures, the plan could stop the slide in home prices by as much as $6,000 per property.
"The effects of this crisis have also reverberated across the financial markets. When the housing market collapsed, so did the availability of credit on which our economy depends," Obama said. "As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition, and harder for businesses to secure the capital they need to expand and create jobs."
While some of the measures Obama announced can be implemented by government regulators, others will require congressional approval. For example, a key part of the package includes legislation that would bankruptcy law to allow judges to modify the mortgages of distressed homeowners, including by reducing the principal of the loan to the property's current market value.
While broad, the package does not tackle some key issues, critics said, noting that it does not include a plan for dealing with second mortgages, which often become a stumbling block for mortgage-modification programs. Others pointed out that for many lenders, the program would be voluntary.
"This is a major step forward to addressing the foreclosure crisis," said John Taylor, president of the National Community Reinvestment Coalition. "But the plan may not be aggressive enough. While the plan offers sweeteners to encourage lenders and homeowners to participate, its voluntary nature may blunt its impact."
The plan also does not require lenders to lower the principal owed by homeowners whose home values have fallen below what they owe on their mortgages, a situation known as being "underwater." Those homeowners are among the most likely to go into foreclosure. "Sooner or later something bad will happen, and the consumer's motivation to continue to make payments is undermined by negative equity," said Alan White, an assistant professor at Valparaiso University School of Law. "This is a lot better than the plan from last year, but it's still missing some important elements."
The modification program also does not fully deal with the millions of loans sold into securitized pools, known as private-label securities, making them difficult to modify, financial service industry officials said.
And some mortgage industry analysts are concerned that the package focuses only on owner-occupied homes and not investors -- a politically understandable position but one that ignores the fact that investors accounted for as much as 40 percent of home sales during the peak of the housing bubble.
Administration officials said they tried to provide enough help to stem foreclosures while not rewarding borrowers who purposefully stop paying, or helping people with the financial resources to help themselves. At the same time, they wanted to risk only as much taxpayer money as absolutely necessary, they said.
Obama stressed Wednesday that the plan "will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans."
Another key part of the package would loosen lending standards at Fannie Mae and Freddie Mac to allow millions of homeowners to qualify for refinanced loans at a time of historically low mortgage rates. Many homeowners do not currently qualify for refinancing because the level of equity in their homes has not reached 20 percent, something that has been exacerbated by plummeting housing prices throughout most of the country.
Under the program, homeowners would be eligible to refinance as long as their mortgage does not exceed 105 percent of the current value of their property. For example, if the value of a property is $200,000 but the owner owes $210,000, he or she could qualify.
But in the hardest-hit parts of the country -- including California and Arizona -- where prices remain in a free fall, that may not be enough. "Why cap it at 105 percent? Why not refinance based on whatever it is?" asked John Courson, president and chief executive of the Mortgage Bankers Association.
The major thrust of the package is a $75 billion initiative to keep homeowners out of foreclosure using myriad incentives to encourage lenders to lower payments to affordable levels, an attempt to tip the scales and make helping homeowners more profitable for lenders than foreclosure.
Jamie Dimon, chief executive of J.P. Morgan Chase, said that his company would voluntarily participate in the modification program and that executives at other large banks told him they also plan to participate. "We have to see the details, but what we see today looks terrific," he said in an interview. "We have been urging the government to have a national modification program for us to follow."
Under the plan, after a lender agreed to lower a borrower's payment so that it made up no more than 38 percent of his or her income, the government would share the cost of lowering the payment further, to 31 percent of the borrower's income.
The plan rewards lenders with as much as $1,000 for each modification and another monthly "pay for success" fee as long as the borrowers stay current. If a lender reaches at-risk homeowners before they miss a payment and modifies the loans, the lender would be eligible for additional incentive payments.
The program also includes incentives for homeowners. Borrowers who stay current on their mortgages after a modification would be eligible for a $1,000-a-year reduction in their principal balance.
"It is a step in the right direction but an overly expensive one," said Edward R. Morrison, a professor at Columbia Law School who has been studying loan-modification efforts.
Foreclosures are expensive, and it is often in a lender's best interest to lower borrowers' rates to keep them in their homes, Morrison said. "I don't think lenders need this buy-down help," he said. "Lenders already benefit from a loan modification. They don't need the extra gravy from a government handout. Why do we need to throw more money at the lenders?"
And the modifications may provide only temporary relief for some homeowners. After their interest rate is reduced to as low as 2 percent, it would begin to increase after five years, said White, from Valparaiso School of Law. "You're building payment shock into people's loans, and the payment shock is what created the problem in the first place," he said. "You are assuming again that home prices will continue to rise. Give permanent relief. Give them a fresh start, and the economy can begin to recover."
Merle reported from Washington. Staff writers Binyamin Appelbaum, Lisa Rein and Lori Montgomery in Washington contributed to this report.
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