After a year of failed efforts, Congress and the new administration are considering more aggressive measures, including a possible change to bankruptcy law. Homeowner relief could come as part of a new economic stimulus plan, a revised financial system bailout program or as a standalone measure.
So far, progress remains painfully slow. More than 3 million homes have been lost to foreclosure since the housing bubble burst. Roughly one in 10 homeowners with mortgages are either in foreclosure or more than 30 days late in payments — the highest delinquency rate on record.
Without more aggressive measures, another 8 million to 10 million foreclosures are forecast over the next four years, according to Credit Suisse. That amounts to roughly one in six households with a mortgage
It is simply mind-boggling to me that (Congress and the White House) have moved so slowly to address this issue,” said John Taylor, president of the National Community Reinvestment Coalition, which has been lobbying for foreclosure relief.
Congress and the incoming administration are taking a multipronged approach to foreclosure relief.
"Accelerating foreclosures is obviously, in my view, the huge driving problem right now,” said Elizabeth Warren, a Harvard law professor appointed by Congress to chair a panel overseeing the financial bailout. "Until we think in a more comprehensive way, we can't create solutions that will really make a difference," she told Congress last month.
Many of solutions tried so far have been stymied by the legal morass created by the modern mortgage.
In past recessions, it was not uncommon for lenders to work out more affordable terms with borrowers who had fallen on hard times. Bankers often prefer to cut their losses by lowering monthly payments and stretching them out over a longer term rather than bearing the cost of foreclosure. But the complex system of financing the recent housing boom — which was based heavily on the pooling of mortgages that were then sold to thousands of investors — has hopelessly complicated a once fairly simple renegotiation between lender and homeowner.
Multiple classes of investors, each with different claims on the same mortgage, often have conflicting interests. Some will do better with a loan foreclosure while others would profit by keeping the loan performing. Some contracts setting up these pool pay loan “servicers” — the companies that manage mortgage payments to investors — more generous payments for loans in foreclosure and offer little financial incentive to undertake the more costly process of modifying terms.
“You have got to have the investor or their representatives come to the table motivated to do something,” said Taylor. “And that’s currently what we don’t have.”
To break the logjam, Congress is considering various proposals, including both "carrots" and "sticks."
One of the "carrots" is included in a proposed revision to the $700 billion bailout of the financial industry known as the Troubled Asset Relief Program, or TARP
Foreclosure Proposals:
Brankuptcy Law:
A deal between key Democrats and Citigroup opens the door for a measure first introduced a year ago that would allow bankruptcy judges to modify the terms of first mortgages on primary residences -- the only debt excluded from the bankruptcy process.
Under the latest proposal, borrowers must contact the mortgage lender 10 days prior to filing Chapter 13 to give the parties time to work out a modification. If no offer is made by the lender, the homeowner could file Chapter 13 and the judge could then treat as unsecured debt any amount of the mortgage that exceeds the newly appraised value of the home. The judge also could reduce the interest rate and extend the maturity of the loan.
This so-called "cramdown" provision is strenuously opposed by the lending industry, which argues that the risk that a loan will later be modified will increase the cost of borrowing.
FDIC PROGRAM:
Using Troubled Assets Relief Plan funds, the Treasury would pay mortgage servicers $1,000 for every modification they make under the program. Modifications must bring a borrower’s mortgage debt-to-income ratio to 31 percent.
Mortgage servicers start by reducing interest rates before extending the maturity to up to 40 years. If those steps do not work, the servicer defers principal. That means the borrower does not pay interest on part of the loan, though he must repay the full balance when he sells or refinances the house.
Hope Program:
Approved last summer under the Housing and Economic Recovery Act, the Hope for Homeowners program has $300 billion available to refinance troubled borrowers into FHA mortgages. Legislative restrictions on the program have made it largely ineffective.
Congress is expected to eliminate many of these restrictions as part of the TARP revision, which means lenders will absorb a smaller loss if they refinance a troubled borrower into an FHA mortgage.
GSE/FHA Loan Program:
The maximum limit for Freddie Mac, Fannie Mae and FHA loans dropped to $625,500 on Jan. 1. Many Democrats, including House Financial Services Chairman Barney Frank, support restoring the maximum loan size to the prior limit of $729,750.
This would help lower interest rates on these mortgages. FHA is becoming the program of choice for first-time buyers. Higher limits also put more homes in higher cost coastal cities into play for FHA.
Tax Incentives:
Spurred by the homebuilding industry, Democrats are working on tax strategies to help with the housing crisis. These include a tax credit available to all homebuyers, not just first-timers, of $7,500 -- and perhaps more.
The mortgage interest deduction may be extended to taxpayers who don't itemize. Tax incentives may also be provided to owners who rent out vacant properties.
Lower Mortgage Rates:
So far, the Federal Reserve has led the move to lower longer-term interest rates after targeting short-term rates as low as zero percent. Congress is looking at additional efforts to push mortgage rates as low as 2.99 percent.
These measures could include providing an explicit government guarantee on mortgages issued by Freddie Mac, Fannie Mae and federal home loan banks.
