Hope for Strapped Homeowners

The Making Home Affordable program finally gets off the ground

There's finally room for optimism that the rising tide of mortgage loan foreclosures that have been swamping the housing market is on its way to receding.

Up to now, government programs aimed at modifying or subsidizing the terms of mortgages to make them more affordable to overextended borrowers haven't made much of a dent in the near tsunami of foreclosure sales that have driven down housing prices by as much as 50 percent in some parts of the country over the past two years. Indeed, foreclosure proceedings nationally rose to a record 340,000 in April. And the Mortgage Bankers Association has estimated that nearly 8 percent of borrowers are delinquent on their loans.

The multi-faceted $75 billion Making Home Affordable program that the Obama administration announced in February was heralded as providing the assistance needed to get nine million homeowners out of trouble. But as with other assistance programs that preceded it, very little help has been forthcoming to date.

The biggest part of the problem has been that lenders (or more precisely the firms that service loans on their behalf) have been totally unprepared to cope with making loan modifications on anything like the scale expected. But there's ample evidence that, incentivized by federal funding commitments, the servicers are gearing up to do so.

The four largest firms in the field (Chase Home Finance, Wells Fargo Bank, Citi Mortgage, and Bank of America) have received pledges of close to $10 billion to make loan modifications that meet affordability standards. Chase alone has announced that it has hired and trained 2,500 modifications specialists in 16 offices around the country to process applications, and the others all have websites that encourage borrowers in trouble to contact them for help.

In this part of the country, SunTrust Mortgage proclaims that, "SunTrust is committed to proactive homeowner relief and believes foreclosure prevention is crucial to stabilizing the economy... SunTrust strongly supports the government's Making Home Affordable Plan and, like other institutions, we are working with Fannie Mae and Freddie Mac to ensure we are operationally ready to maximize the number of homeowners we can help under this program."

The program pays servicers a fee of $1,000 for each loan modified once the borrower makes payments for three months and an additional $1,000 in each of the next three years if the borrower stays current. Modifications in the form of interest rate reductions and/or extensions of a fixed rate mortgage's term would have to reduce borrowers' mortgage payments to no more than 39 percent of their documented gross income. Once this threshold is met, the government would then match dollar-for-dollar a lender's cost of further interest rate reductions to get payments down to 31 percent of income, which is considered the gold standard for affordability.

Another facet of the program would remove an 80 percent loan-to-value cap on mortgages owned or backed by giants Fannie Mae and Freddie Mac and allow for refinancing of up to 105 percent of home value in depressed markets. With 30-year fixed-rate mortgages now at 4.8 percent (their lowest level in the 37 years that Freddie Mac has been tracking them) refinancing alone has become a way for anyone who qualifies to substantially reduce their borrowing cost on mortgages originated even a year or two ago when rates were generally well in excess of 6 percent.

Congress just removed another impediment to mortgage modifications by servicers: namely, their fear they could be sued by lenders, especially investors in the huge pools of mortgages whose proliferation contributed to the nation's housing bubble. A "safe harbor" provision would protect servicers against such suits on loan modifications made in conformity with the Making Home Affordable program.

One tool that the Obama administration sought but didn't get from Congress was a stick to go along with the carrots offered by the program. The stick took the form of a bankruptcy law amendment that would allow defaulting borrowers to get the terms of their mortgage changed in court if they could demonstrate that they had sought and failed to get a modification under the program. Paradoxically, bankruptcy law allows for modifications of mortgages on vacation homes and rental properties but not on primary residences. The lending industry managed to ward off a House-passed bankruptcy "cramdown" provision (as it's known) in the Senate claiming that it would result in higher mortgage interest rates.

Arguably, bankruptcies could be preferable to what amounts to yet another federal bailout program for overextended borrowers. But many of them were engulfed by lax or predatory landing practices. And there's widespread agreement that loan modifications can enable lenders to avert deeper losses on distress foreclosure sales that, in turn, drive down housing values to the detriment of all concerned.

In Knoxville, Gary Cooley, foreclosure counseling specialist at Knox Housing Partnership, reports that, "Things are looking a lot better now than last fall. The servicers definitely want to work with us, but all the necessary paperwork and documentation takes time."

Still, there's a good chance that foreclosures here will start to drop, and the 10 percent decline in average home sale prices over the past year (according to Knoxville Area Association of Realtors data) will be arrested.