U.S. Sets Big Incentives to Head Off Foreclosures
WASHINGTON — The Obama administration on Wednesday began the most ambitious effort since the 1930s to help troubled homeowners, offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures.
People with mortgages as high as $729,750 could qualify for help, and there is no ceiling on how high their income can be as long as they are in danger of losing their homes. Interest rates on loans could go as low as 2 percent for some. Many homeowners could see their mortgage payments drop by several hundred dollars a month, and some could save more than $1,000 a month.
Administration officials estimate that the plan will help as many as four million people avoid foreclosure, at a cost to taxpayers of about $75 billion. In addition, the Treasury Department said it intended to follow up with a plan to help troubled borrowers with second mortgages, which many homebuyers used as “piggyback” loans to buy houses with no money down.
The plan is bolder and more expensive than any of the Bush administration’s programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. While the number of loan modifications has climbed sharply, the number of foreclosures skyrocketed to 2.2 million at the end of 2008, a record.
The new plan, which takes effect immediately, is intended to win much bigger concessions from lenders by offering a mix of generous financial incentives and regulatory arm-twisting. The final impact will depend on how both lenders and the investors who own mortgages respond, but housing experts said the administration had a good chance of achieving its goal.
The eagerness with which lenders agree to modify loans is likely to be affected by a bill that the House is expected to take up on Thursday.
It would give bankruptcy judges the power to order changes in mortgages on primary residences and would protect loan-servicing companies from lawsuits by investors.
Several of the nation’s biggest mortgage-servicing companies, overseeing two-thirds of all home loans in the country — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo & Co. are expected to participate in the plan.
In addition, any bank that receives additional federal money under the Treasury Department’s $700 billion financial rescue program will be required to take part. But many lenders are expected to participate voluntarily, because the government would be absorbing much of the cost of resolving their bad loans.
“I predict this program will be extremely effective at reducing foreclosures,” said Eric Stein, senior vice president at the Center for Responsible Lending, a nonprofit advocacy group for homeowners.
Administration officials have similar expectations.
“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” said Timothy F. Geithner, the Treasury secretary.
In releasing detailed guidelines on the plan, first unveiled Feb. 17, the Treasury Department made it clear that the program would not help every homeowner in trouble. It will do little to help families whose income has evaporated because one or more breadwinners have lost their jobs, nor will it save those swamped by big debts beyond their mortgages. It will not do much for homeowners who are current on their loans but “upside down” — owing more than their houses are worth.
Still, the program, when combined with a separate effort to help homeowners refinance their loans even if they are not in distress, could help put a floor under home prices.
The Treasury has instructed Fannie Mae and Freddie Mac, the two government-controlled mortgage-finance companies, to refinance homeowners at today’s low market rates even if the owners have less than the standard 20 percent equity that is usually required.
This second program applies to about 30 million people with mortgages owned or guaranteed by Fannie or Freddie, but will not be available to people whose mortgages are much higher than their home’s market value.
Administration officials said it could lower monthly payments for as many as five million homeowners. To finance that effort, the Treasury is providing the two companies with up to $200 billion in additional capital, on top of $200 billion that it had already pledged to them.
Under the new loan modification guidelines, the Treasury will offer mortgage-servicing companies upfront incentive payments of $1,000 for every loan they modify and additional payments of $1,000 a year for the first three years if the borrower remains current. The Treasury will also chip in $1,000 a year to directly reduce the borrower’s loan amount, if the borrower stays up to date on payments.
But the biggest subsidies are in reducing the size of a person’s monthly payment. If the lender reduced the borrower’s monthly housing payment to 38 percent of the household’s gross monthly income, the Treasury Department would match, dollar for dollar, the lender’s cost in reducing payments down to 31 percent of monthly household income.
The program calls on lenders first to reduce interest rates to as low at 2 percent for the next five years to hit the monthly income target. After five years, some borrowers would start to pay gradually higher rates, but their rates could not exceed the market rate at the time they renegotiated.
That would be a favorable deal for many people. At the moment, the market rate for such loans is just over 5 percent — very low by historical standards.
The key to determining whether a person receives help will be a so-called net present value calculation by the mortgage company.
In essence, a lender will first have to calculate how much it would cost to reduce a person’s monthly payments to an “affordable” range, 31 to 38 percent of the borrower’s monthly income.
If the calculation shows that the lender’s cost in modifying the loan, after receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the lender would be required to offer a borrower the new deal. If the estimated cost of the concessions appeared to be higher than the cost of foreclosure, the decision would be voluntary.
Housing experts estimate that lenders lose about half the outstanding loan amount if they pursue foreclosure, and those losses are climbing as the resale value of houses continues to fall. As a result, the program could lead to millions of loan modifications.
Borrowers cannot be charged any modification fees, the Treasury Department said. Lenders will have to bear the administrative expense of reviewing the loans and making their cost estimates. Treasury officials said they were trying to warn consumers against fraud artists and consultants who are seeking to collect fees for helping homeowners negotiate with lenders.
There is no ceiling on how much a person can earn and still qualify for help, but the size of the mortgage to be modified cannot be higher than $729,750 for a single-family home, or $1.4 million for the mortgage on a four-unit condominium or cooperative.
The program is open only to borrowers who live in the homes at issue, and not to investors or people with mortgages on second or third homes. It is open to people who obtained a mortgage before Jan. 1, 2009. Borrowers can apply for loan modifications until the end of 2012.
Unlucky or Unwise, Some Homeowners Left Out
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.
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.”
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