More Help for Struggling Homeowners from the Obama Administration

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We need principle reduction to market value.  Okay, lets read and see if that's what been proposed here.


A new initiatives help sinking home owner get above water? Or are they just a boon for banks? Pat Garofalo investigates. Thank you Pat for this information.

Last week, after months of dropping hints and offering assurances that existing programs were doing just fine, the Obama administration finally released a set of initiatives aimed at helping homeowners who are “underwater,” meaning that they owe more on their mortgage than their house is worth. According to the Treasury Department, “these changes will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.”
On one level, it’s encouraging that the administration has finally acknowledged that negative home equity is a problem deserving of its own distinct set of policy prescriptions. Almost one in four homeowners in the country (about 11 million borrowers) is underwater on his mortgage, particularly in the parts of the country that were hardest hit by the housing crisis. By June, 5.1 million borrowers are expected to have home values that are below 75 percent of their outstanding mortgage balances, which research suggests is when owners start to seriously consider walking away, even if they have the money available to pay.
Up to this point, the administration’s response to the housing crisis has been, to put it mildly, lackluster. The Home Affordable Modification Program (HAMP), which was supposed to keep 3 to 4 million borrowers in their homes via lower monthly mortgage payments, has so far resulted in just 168,000 permanent mortgage modifications. Last week, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) issued a scathing report criticizing HAMP as a program “that merely kicks the proverbial foreclosure can down the road.”
The SIGTARP report included the startling statistic that the average borrower in HAMP is underwater, even though HAMP was not designed with underwater homeowners in mind. According to the most optimistic estimates cited, the average HAMP borrower owes $1.14 in mortgage payments for every $1 in home equity. This means that the lower monthly payments which HAMP was designed to facilitate will often end up simply delaying a foreclosure, instead of preventing it.
SIGTARP’s conclusion was that more had to be done to address negative equity, and the “primary method” of doing that is cutting mortgage principal (the total amount owed on the mortgage). And SIGTARP is by no means alone in this assessment. Nobel Laureate and Roosevelt Institute Chief Economist Joseph Stiglitz has said that a government priority should be figuring out how to write down loan principal, while Mark Pearce, North Carolina Chief Deputy Commissioner of Banks, said that those not addressing principal reduction as a means of reducing foreclosures are “close to being in denial.”
Even within the federal government, there have been those advocating for principal reductions. These include Federal Deposit Insurance Corp. Chairman Sheila Bair, who has said that such a move “could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans.” Unfortunately, as the Huffington Post’s Shahien Nasiripour pointed out, HAMP was so reliant on reducing monthly payments that it actually discouraged principal reductions, which less than two percent of borrowers in HAMP received.
So at least the administration is finally trying to tackle negative equity with its two new initiatives. The first allows borrowers who are current on their mortgage, but who are underwater, to refinance into a Federal House Administration (FHA) loan for 97 percent of the property’s current value. $14 billion in TARP money will be used to fund this program, and losses on the refinanced FHA loans will be born by the government.
The second program will allow HAMP eligible borrowers to receive a principal cut if that would save them more money than the standard HAMP modification. But like HAMP, under this program, the lender would have to agree to the principal cut for it to move forward, and the lender will receive financial incentives for doing so.
And this is where the new initiatives may run aground. Just like HAMP, the program only works if the lenders agree to principal cuts. If they feel that foreclosing is a better bet for their bottom lines, then they don’t have to play along. HAMP’s fatal flaw was that it relied on carrots for the lenders, but had no sticks if they chose to either string borrowers along for months or simply refuse to pull them into HAMP in the first place.
This program could suffer from the same fate. As John Taylor, the head of the National Community Reinvestment Coalition, said, “I’m not optimistic that the incentives will be enough to entice servicers and investors to reduce loan principals. Will they help seven million people who are at risk of foreclosure? I will be pleasantly shocked if investors step up for half a million borrowers.”
There is some evidence that banks are coming to the conclusion that principal cuts may be beneficial to them. Bank of America, for instance, instituted a principal reduction program (with a bit of cajoling from the Massachusetts prosecutor’s office). But at the end of the day, the administration seems to still be hoping that lenders themselves step up and do the right thing, with a little federal money sent along to sweeten the pot. Given the way in which the banking industry has responded to the financial crisis so far, I’m not sure I’ll be holding my breath.

Pat Garofalo is the Economics Researcher/Blogger for WonkRoom.org at the Center for American Progress Action Fund. His work has also appeared in The Nation, The Guardian, the Washington Examiner, and AOL News.