Wednesday, November 12, 2008

New federal mortgage plan offers relief to only a few

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By Kevin G. Hall

The Bush administration on Tuesday announced another plan to modify what it thinks will be hundreds of thousands of distressed mortgages held or backed by mortgage finance giants Fannie Mae and Freddie Mac.

But the plan, more than 15 months into a deep nationwide housing slump, is far short of the moratorium on foreclosures sought by President-elect Barack Obama and the Democrats who next year will have stronger control Congress. It would help only a relatively small number of homeowners whose loans Fannie Mae and Freddie Mac packaged and resold to investors as so-called mortgage-backed securities and a still smaller number of homeowners whose loans Fannie Mae and freddie Mac have kept on their books.

In a briefing conducted on the condition of anonymity, officials involved in the plan acknowledged that it might reach only 200,000 or so homeowners next year. That's a fraction of the 2.8 million who are thought to face foreclosure this year.

But offficials said they hope that the effort, which begins Dec. 15, will become a standard across the private sector, which holds far more troubled loans than Fannie Mae and Freddie Mac. The move follows announcements by private lenders such as Bank of America, J.P. Morgan Chase and most recently Citigroup that they'd voluntarily rework troubled mortgages.

"Troubled borrowers eligible for this program have already experienced significant erosion in their credit scores, making them unlikely to obtain mortgage credit through typical means," said James Lockhart, the director of the Federal Housing Finance Agency, which has assumed responsibility for Fannie and Freddie since the Treasury Department seized them in September.

Together, Fannie and Freddie own or back about 58 percent of all U.S. mortgage debt — about 31 million mortgages — and they've historically been associated with the nation's decades-long expansion in homeownership.

But because Fannie and Freddie were congressionally chartered private companies, they had tighter lending requirements than the Wall Street companies that securitized, or pooled, mortgages for sale to investors. Fannie's foreclosure rate through the end of September was 1.6 percent, versus nearly 20 percent for sub-prime adjustable-rate mortgages packaged and sold by Wall Street firms that have mostly gone bust.

To qualify for the new program, homeowners whose loans are owned or packaged by Fannie and Freddie must be 90 days or more past due on their payments for single-family dwellings in which they live. They must prove hardship, can't be in bankruptcy and their outstanding loan values must be at least 90 percent of their homes' current values.

That's important, since the program targets homeowners who are nearly or completely underwater, owing more than their homes are worth in a sinking market. This should help homeowners in Florida, Nevada and the less expensive inland parts of California that are suffering steep drops in home values.

If the program's thresholds are met, Fannie and Freddie will modify the mortgage with the goal of a monthly payment equal to about 38 percent of the holder's total income.

The goal could be achieved three ways: The loan could be stretched into a 40-year fixed-rate mortgage; the interest rate could be reduced; and/or money going to the mortgage balance, called the principal, could be deferred interest-free until the end of the loan and recaptured in what's known as a balloon payment. Fannie and Freddie will pay $800 to financial institutions for each loan they modify.

Officials from the departments of Treasury, Housing and Urban Development and the Federal Housing Finance Agency gave speeches touting the effort. They didn't take questions.

In a subsequent briefing conducted on the condition of anonymity, officials involved in the plan acknowledged that it might reach 200,000 or so homeowners at best next year. That's a fraction of the 2.8 million who are thought to face foreclosure this year.

"It's a first step," one official said, acknowledging that the private sector already is taking many of these steps.

Tuesday's plan was patterned after similar efforts by the Federal Deposit Insurance Corp., but it didn't go far enough for FDIC Chairman Sheila C. Bair.

"This is a step in the right direction but falls short of what is needed to achieve wide-scale modifications of distressed mortgages," Bair, a critic within the Bush administration of current mortgage-rescue efforts, said in a statement.

"Given continually rising foreclosures and their impact on the economy, we must address the need for appropriate economic incentives to prevent unnecessary foreclosures," she said. "As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans."

Fannie Mae on Monday reported a $29 billion loss for the quarter that ended Sept. 30. Its leaders have warned that the current level of government support may not be enough to support its new mission of jump-starting the mortgage market.

The Bush administration to date has taken a voluntary approach on mortgage modifications, creating a program called Hope Now in which leading banks and financial institutions pledged to do all in their power to rework distressed mortgages.

That effort has been very slow, however, and John McCain last month criticized the administration for not using taxpayers' money to issue new loans that matched homes' present-day values.

"Everything to date has been voluntary, and it really hasn't worked and hasn't been enough," said Evan Fuguet, senior policy counsel for the Center for Responsible Lending, a housing advocacy group in Durham, N.C. "We think more needs to be done."

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