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What a homeowner bailout package might look like
How bailout might help troubled homeowners
Carolyn Said, Chronicle Staff Writer
Wednesday, September 24, 2008
Under Democratic pressure, Republicans and the Treasury Department on Monday agreed that the bailout plan, which is still in flux, will include some kind of help for distressed homeowners. But just how this will be structured is a matter of fierce contention.
Some economists say that modifying home loans to make them more affordable will slow down the masses of foreclosures, thus putting the brakes on plunging home prices.
"If we solve the foreclosure problem at the consumer level, the root cause of the present problem, we will increase the value of mortgage-related securities and reduce the losses to the system," wrote Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, in a position statement. "Foreclosures, all else equal, will double the loss on mortgages versus a loan modification program that keeps people in their houses."
Consumer advocates say that loan modifications make sense both economically and to redress the wrongs done to borrowers who may have been defrauded or subject to predatory lending.
"We want to stop the automatic foreclosures on people and get them into the pipeline; be creative to keep people in their homes," said John Eller, a community organizer with the Association of Community Organizations for Reform Now (ACORN), which on Tuesday held a small rally outside the Federal Reserve of San Francisco, calling for the bailout plan to include help for people facing foreclosure under the slogan "Bail out Main Street, not just Wall Street."
A range of other community groups, including the Center for Responsible Lending, the National Community Reinvestment Coalition, the Leadership Conference on Civil Rights and AARP, are calling on Congress to specifically address keeping struggling families in their homes.
But there's a strong pushback against that sentiment on some parts of Main Street among citizens and legislators who think it's not fair for taxpayers to have to pay the tab for people who borrowed beyond their means.
"Nobody was ever forced to borrow money," said Patrick Killelea of Menlo Park, who runs the popular Patrick.net "housing bubble blog" Web site. "People who borrowed too much money made a mistake. If they can do that with impunity, they will keep on doing it."
His response to the argument that stopping foreclosures would prop up housing prices: "Every prevented foreclosure also prevents a deserving family from buying at a reasonable price."
Here are some ways in which the bailout plan might address delinquent home loans. As the details are still being hashed out, exactly what will end up in the final plan could change rapidly.
Loan modifications: Changing mortgages to make them more affordable is considered the best long-term solution to keep people in their homes and is likely to be the centerpiece of whatever consumer assistance the bailout plan offers. But, as with the bailout itself, the devil is in the details.
"You should try to work toward a mutually beneficial transaction just like the market does," said Alex Pollock, a senior fellow at the American Enterprise Institute, a conservative think tank in Washington, D.C., and former CEO of the Federal Home Loan Bank of Chicago. That means, he said, "a reworking of the mortgage, where the investors will be better off than they otherwise might be, and so will the borrowers."
In other words, a loan modification that costs the investors - Uncle Sam and taxpayers - less than a foreclosure would.
The biggest stumbling block may be that a significant number of borrowers may not have enough income to afford their home loans under almost any circumstances.
Foreclosure moratorium: A temporary halt to foreclosure proceedings - say three months or six months - would create breathing room for mortgage servicers and borrowers to work out loan modifications.
Bankruptcy law change: The most controversial idea is to change bankruptcy law, allowing judges to modify mortgages to make them affordable for bankrupt families. The banking and mortgage industries loathe this idea and have lobbied fiercely to keep it out of Congress' other housing relief bills. But consumer advocates say it's the single-most-needed change and have many Democrats on their side.
"Bankruptcy law (now) generally does not allow a judge to 'cram down' the mortgage for a single-family residence, meaning making an assessment of what the borrower can pay, and pushing down or decreasing the amount of debt so it is at a comfortable payment level," said Jim Randel, a 30-year real estate veteran and author of the book "The Skinny on the Housing Crisis: What Every Homeowner and Homebuyer Needs to Know."
"In the commercial world that happens; if I own an office building and go into bankruptcy, the judge can cram down the debt so I can come out of reorganization and pay the mortgage."
Randel said he thinks the bailout plan should try to stimulate the market by including tax incentives for home buyers - similar to the $7,500 tax credit (actually a no-interest 15-year loan) that was included in the housing rescue act passed this summer.
How many people will increased loan modifications help? Rosen's position statement said it could save perhaps 75 percent of struggling homeowners.
But Dean Baker, director of the Center for Economic and Policy Research, a progressive think tank in Washington, D.C., said he thinks far fewer homeowners will turn out to be financially qualified for a modification.
"If someone can't afford it, we're not going to buy them a house," he said. "I don't think it will transform the housing market. Maybe it will reduce the number of foreclosures by 10 percent or 15 percent if we're lucky. We still have an awful lot of people with mortgages they can't afford."
Why altering loans doesn't always work
The Consumer Credit Counseling Service of San Francisco handles about 2,500 calls per month from struggling homeowners, about 40 percent of them from the HOPE Hotline, a Bush administration-backed consortium of lenders. The credit service's results, as related by Rick Harper, vice president and director of housing, provide a snapshot of how often loan modifications actually occur. Of every 100 referrals:
-- 20% need budget improvement before a workout would be possible.
-- 10% want to sell or walk away from their home.
-- 35% are not financially qualified for a loan modification because they don't have enough income.
-- 17.5% are judged as qualified for a loan mod by the counseling service but do not get one. Harper said the service takes callers' word about their income, assets and debts. Problem areas may emerge when lenders try to verify this information.
-- 17.5% are deemed qualified for a loan mod by the service and do get one.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/24/BU57133LNM.DTL
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I still don't support this idea.
Re: What a homeowner bailout package might look like
I don't support this either.
As those numbers at the bottom show, loan modifications only help relatively few people. And since we already have a program to deal with loan modifications why would this be included in the new bailout legislation?
A foreclosure moritorium would only push the problem into the future. Postponement of a problem =/= a solution.
Bankruptcy law changes like what is described in this article would probably result in tons of people declaring bankruptcy to get their loans adjusted. Why wouldn't all of us do that? If we don't plan on selling our house and getting a new mortgage any time soon then it doesn't matter that our credit goes in the sh!tter for a few years. Look how much money we'd save by having lower payments. If this is supposed to help the people who need loan modifications then they should just use the existing loan modification programs. We don't need to clog up the legal system with people who just want to get out of paying their bills.
None of this will help the people who can't sell their homes, or who are un/underemployed and couldn't even pay a modified loan amount. None of this would help with the speculators who walked away from their homes b/c of the loss of equity. In short, as this article says, it won't work and it's a waste of money.
I will admit to not reading the whole thing, but does this plan address the issue of empty houses?? Here in Atlanta there are a ton of empty houses left by speculators. I selfishly would like this issue addressed first. If I am not mistaken, empty buildings were also a result of the S&L crisis. Didn't government take them and sell them off in chunks? Aren't there cities in California doing the same thing?
Why does the government have to make loans more affordable when there are banks already doing this. I know someone who recently worked out a plan with Countrywide to reduce their payment from 2200.00 a month to 1400.00 a month. I would hate to provide one example as basis for an argument, but its my understand that many banks of similar programs.
I was thinking the exact same thing yesterday! Banks don't want to foreclose. They don't want to own real estate. They would rather work with people to get them into a new payment plan and save the home. So we are talking about people that the bank couldn't even work with. WHY SHOULD I HAVE TO???!!!
What do you think should be done? I've tried to brainstorm about this issue and haven't come up with much.
We have tons of foreclosures in MI too (I think we are in the top 3 states for foreclosures, with the #1 county, or something like that). IMO the gov't will not be able to do anything about abandoned homes b/c it would be impossible for any entity, public or private, to force buyers into them. We have an excess supply of homes on the market. That isn't going to go away until the price drops enough that demand picks back up.
The gov't did bundle and sell assets after the S&L crisis and I agree the solution could be similar (a resoution trust corp type of thing). the RTC in the early 90s sold the assets (bad debt, real estate assets, etc) but that doesn't mean people moved into abandoned/foreclosed homes. It just means ownership of the property transferred to another bank/investment co. That's what would happen now if the gov't bought and sold the bad debt from investment banks. i'm guessing you're looking for a way to get those homes lived in and off the market. I think only increased market demand will accomplish that.
Exactly! That was my point yesterday. Banks/mortgage co's already have a financial incentive to help people continue making payments, which is why that HOPE program and others actually work (for the limited people that need a simple interest rate reduction). We certainly don't need to give homeowners/banks money to accomplish that, or whatever a homeowner bailout would do. It's not the responsibility of the taxpayer to prop up someone's investment choices.