Main Street

Mortgage Fixes Broken

Last week we reported that while the number of home foreclosures in 2009 would likely set a new record for the second consecutive year, analysts say the wave of foreclosures won’t peak until 2011.

The next day the Wall Street Journal reported that one-quarter of U.S. homeowners are “underwater”, meaning they owe more on their mortgages than their homes are worth.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.
These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.
Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale.

This week the Administration responded with a well-intentioned effort to push mortgage lenders to convert more trial loan modifications into permanent reductions under the existing Making Home Affordable program. That program has been hobbled from the outset. The banking lobby succeeded in removing viable mandatory requirements in the legislation, defeated the “cramdown” provisions for court-ordered mortgage reductions, and substituted a more voluntary approach where lenders are offered TARP incentive payments.

Apparently the banks have not been very impressed with the size of those TARP incentives, having only converted a tiny fraction of trial modifications into permanent mortgage reductions.

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”

Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments.

Reporting on Treasury’s latest effort to pressure mortgage firms The New York Times also included a graphic listing where top banks stand so far on making mortgage reductions permanent.

The Treasury Department has blamed banks and mortgage companies, which it says have been slow to process documents, for the program’s lukewarm start. Homeowners participate in the program for up to five months on a trial basis, and if they make timely payments and provide documents proving their financial need, they are eligible for permanent reductions.

On Monday, the department said it would require lenders to submit plans outlining how they will increase the number of homeowners given permanent mortgage reductions.

If they fail to do so, the department said it would use “any and all authority” to impose fees and other sanctions. It will also publicly list the worst offenders and withhold cash incentives until reductions in mortgage payments are made permanent. In addition, the Treasury Department will appoint staff to monitor the progress of home lenders on a daily basis.

Yet despite the good intentions of those in the Administration working on the program, some homeowner advocates and policy analysts question whether a different approach is needed.

The Center for Responsible Lending says “Tweaking Voluntary Measures Won’t Stop Foreclosures”:

To address the foreclosure crisis that’s at the root of the current slump will require more comprehensive action. Specifically, Congress must:

• Require loan companies stop foreclosure proceedings while loan modifications are under consideration.
• Require loan companies to work with homeowners in distress. Recognizing that the current voluntary system has failed, the House and Senate currently are considering bills to make loss mitigation efforts mandatory.
• Create a low-cost, short-term loan program for unemployed homeowners who have no other option for keeping current on their mortgage.
• Require Treasury to go beyond selectively publishing loan servicing data and make all data available so the public—including taxpayers—can better evaluate the program and the efforts of individual companies.
• Allow stressed homeowners the option of lowering their principal mortgage balance, including through bankruptcy courts.

Former Labor Secretary Robert Reich scoffs at Treasury’s intention to use “shame” as a way to pressure the banks:

Shame? If we’ve learned anything over the last year, it’s that Wall Street has none. Ten months ago Wall Street lobbyists beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown.

Shame? For Wall Street, it all comes down to PR, at minimal cost. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million PR program to help Main Street.

Shame won’t work. Only political muscle and courage will. Congress and the Obama administration should give homeowners the right to go to a bankruptcy judge and have their mortgages modified.

And not stopping there, Reich adds:

And while they’re at it, resurrect the Glass-Steagall Act that used to separate investment from commercial banking, so Wall Street can’t continue to use other people’s money to gamble.

Finally, before Goldman hands out $17 billion in bonuses, claw back the $13 billion Goldman took from AIG and the rest of us and add it to the pool of money going for mortgage relief.

Questioning just how the TARP pool is being used to for incentive payments to banks rather than helping homeowners more directly, economist Dean Baker offers an alternative approach:

There is a simple way to ensure that the TARP deals actually help homeowners more than banks. Suppose that before any modification goes through the government calculates the full value of the subsidies it is giving to the bank. We then reduce this amount by 10 percent and give the homeowner the option to take this amount in lieu of a mortgage modification.

To put this in numbers, suppose that the government is proposing to pay out $20,000 to modify a mortgage. Before, it goes through with the deal, it offers the homeowner $18,000 to just walk away.

If the homeowner takes the money, then obviously the modification was worth less than $20,000 to them. Also, the government ends up saving $2,000 on the deal. Both the homeowner and the taxpayer ends up better off in this story, the only losers are the bank.

Tags: foreclosures