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Obama Administration Takes Major Step Forward To Address Foreclosure Crisis
Washington, DC – Today, the Obama Administration released its much-anticipated foreclosure prevention plan. The plan is the most comprehensive to date that addresses the crisis in the housing market stemming from mounting foreclosures and falling home values.
“This is a major step forward to resolve the foreclosure crisis,” said John Taylor, president and CEO of the National Community Reinvestment Coalition. “But the plan may not be aggressive enough to effectively deal with the scale and magnitude of this epidemic. The plan’s voluntary nature may blunt its impact.”
The plan aids households that have been financially harmed by declining home prices by assisting them to more easily refinance their loans at a government-offered rate of 5.1%. While the plan does not compensate families for the lost values on their properties, it offers some relief through significantly lowered monthly mortgage payments, ranging, on average, between $150 and $200 or more. These savings might also provide an important additive stimulant to the economy; assuming $200 per month savings, this translates into savings equivalent to six times the individual tax rebate included in the recently enacted economic recovery package.
Regarding households threatened with foreclosure, the plan also offers a broader set of tools than any other proposed government program. By sharing with investors the cost to write down loans, the federal government takes a more active role in encouraging mortgage holders to be responsive to the pressing need to modify loans. The plan also makes modified loan payments affordable, by dropping them to 31% of a borrower’s income. Finally, by offering financial incentives to servicers, the plan addresses the financial burden they experience when modifying loans, and encourages them to be proactive in identifying and addressing problem loans.
The plan is also helpful because of its support for bankruptcy reform. Judicial modifications of loans held by consumers who face bankruptcy would allow families to modify the terms of their loans in a court of law. This new access to the courts for struggling homeowners would create an additional incentive to encourage servicers to modify loans, rather than assigning authority to a third party.
While the plan takes important steps forward, it fails to address one of the most daunting challenges to homeowners threatened with foreclosure, specifically instances in which the principal loan amount exceeds the value of the home. Nationally, home prices have fallen by 25% and continue to drop as the housing market becomes increasingly unhinged. In areas where foreclosures are heavily concentrated, home values have fallen by 30% to more than 50%. The plan does not acknowledge the need to create sustainable loan modifications when interest rate buy-downs are, by themselves, insufficient.
In addition, loan modifications under the program are temporary and would expire after five years. Yet, it is not clear why a consumer would be able to afford a loan five years from now that they cannot afford today. Having these modifications unwind after five years might spur the problem down the road, having it reappear just as the housing market and economy are beginning to recover.
Finally, the voluntary nature of the program should be revisited if the current incentives are unsuccessful in promoting broad-scale loan modifications. Currently the plan operates solely on incentives to servicers and holders of loans. Investors, for example, do not receive any substantial financial incentives to participate in the program, and they should not. Though loan modification is in the best interest of investors, they continue to resist. It is unclear why investors will be compelled to participate more under this plan. Further, although servicers are financially incentivized to participate, the plan lacks indemnification that would protect servicers from investor lawsuits.
Given the dire economic consequences of failing to stem the foreclosure crisis, mandatory loan modifications, as a last resort, seem reasonable.
