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White House may move to buy mortgages
New proposal could break logjam of foreclosure relief efforts By John W.
Schoen Senior producer updated 10:47 a.m. ET, Thurs., Feb. 12, 2009
The White House is considering a proposal to head off potentially
millions more home foreclosures by using federal funds to buy up at-risk
loans and then refinance them with more affordable terms.
Treasury Secretary Timothy Geithner and other Obama administration
officials met Wednesday with a group of top bankers, community groups
and financial industry representatives to discuss the plan.
So far, government efforts to prevent foreclosures have focused on
pressing the lending industry to work with at-risk homeowners
voluntarily and provide them with more affordable payment terms. But the
new proposal signals a shift to a more direct government approach,
according to John Taylor, president of the National Community
Reinvestment Coalition, who attended the meeting with Geithner, Housing
and Urban Development Secretary Shaun Donovan and other Obama
administration officials.
"What they heard from all segments of the industry is nearly universal
support for going in and purchasing these loans," said Taylor.
The proposal is one of several being discussed as the White House
completes the details of its comprehensive plan to stabilize the
financial system and limit a wave of new foreclosures expected over the
next few years. Others include legislation to speed up loan
modifications and efforts to make new mortgages more affordable.
Under the proposal, the government would draw on $50 billion in funds
already approved for the financial bailout to buy up millions of
mortgages at a discount. A $300,000 mortgage on a house now worth
$200,000, for example, might be bought at a 30 percent discount.
The homeowner then would be able to refinance the smaller mortgage with
lower monthly payments. The government could then sell the loan back to
investors, freeing money to buy more loans.
The new approach could eliminate one of the biggest roadblocks that has
stymied the government efforts to buy up so-called "toxic assets" that
are clogging the financial system. Trading in these securities - backed
by thousands of loans - has all but shut down because banks, investors
and potential buyers are unable to predict their future value. But
individual loans are much easier to value, making government purchases
more practical, according to the plan's proponents.
Taylor estimates that of the roughly 10 million to 12 million households
facing foreclosure over the four years, about 4 million to 5 million
would be able to keep their homes. The plan would also help clear
distressed mortgages from the financial system and free up more lending,
said Taylor.
"These investors have suffered this loss - they just haven't realized it
yet," he said. "It's an unrealized loss that the government takes and
then converts it into a gain for millions of homeowners."
A spokesman for the Dept. of Housing and Urban Development confirmed
that the White House is considering a plan to buy up bad loans directly.
Treasury officials were unavailable for comment.
White House officials this week stressed the urgency of acting to shore
up the nation's banking system to avert a potential "catastrophe." But
slowing the pace of foreclosures is essential to reducing the glut of
homes on the market and resolving the crisis, according to Columbia
University economics professor Christopher Mayer.
"We've got to deal with housing," he said, "because, look, if housing
drops another 20 to 25 percent, I can promise you a lot more of these
mortgages are going bad, and we're going to have a much bigger problem."
Some 275,000 foreclosure filings were reported in January - or about one
in 466 households - an 18 percent increase over January 2008, according
to data released by RealtyTrac Thursday. The pace slowed 10 percent from
December, largely because of a temporary freeze on new foreclosure
filings by several states and mortgage giants Fannie Mae and Freddie
Mac, RealtyTrac reported.
On Wednesday, the Office of Thrift Supervision urged lenders under its
regulation to suspend foreclosures on owner-occupied homes until the
White House completes its mortgage relief program. As of the third
quarter of 2008, the roughly 800 lenders regulated by the office had an
outstanding mortgage portfolio of more than a half-trillion dollars.
To date, industry efforts to halt the pace of foreclosures have proved
inadequate. In congressional testimony Wednesday, CEOs of the nation's
top banks told of hundreds of thousands of loans modified to date.
But according to the Office of the Comptroller of the Currency, more
than half of the 287,755 mortgage workouts in the third quarter of 2008
involved repayment plans that, in many cases, increased the monthly cost
of the loan to make up for missed payments. That's one reason more than
half of borrowers who had worked out new mortgage terms redefault within
six months, according to the OCC, which regulates nationally charted
banks.
As the housing market has collapsed, roughly one in five homeowners now
owe more on their mortgage than their house is worth. That's created one
of the thorniest problems in the debate over foreclosure relief: Who
should bear the loss when a mortgage is bigger than a home's value?
Various proposals have been floated, including having the government
share some of the loss in return for a stake in the possible
appreciation of the home after it's refinanced.
Until recently, the hardest-hit were borrowers who were sold loans with
low "teaser" interest rates that later reset to unaffordable levels. As
the recession has deepened, the rapid pace of job losses has put
millions more homeowners at risk.
For the past two years, Congress has considered a number of proposals to
try to keep struggling homeowners in their homes. Much of the debate has
centered on how much taxpayer money - if any - should be applied to the
problem. That debate continues to slow progress on adopting these
proposals.
"I think there are a whole variety of plans on the table, and there's no
consensus," said Paul McCulley, a portfolio manager at PIMCO, a large
bond fund. "We also have to remember this is in a political context: The
taxpayer is truly ticked off about this whole thing. Congress has to
consider that as well."
But some longstanding proposals are advancing slowly through Congress.
One of those provisions would overhaul the Hope for Homeowners program
Congress set up last year with the goal of helping more than 400,000
homeowners swap unaffordable adjustable mortgages for 30-year loans with
fixed rates. Tight restrictions and high fees left that program out of
reach for all but 25 homeowners who have been approved to date.
The House bill also attempted to break the logjam at the heart of the
problem with mortgage modifications: the enormous legal complexity
created when trillions of dollars worth of mortgages were bundled into
pools and sold off to investors. Loan servicing companies - originally
hired to collect payments from homeowners and distribute them to
investors - have been slow to respond to modification requests, in part
because they fear being sued by investors.
Under a program overseen by Federal Deposit Insurance Corp. Chairwoman
Sheila Bair, standard guidelines were developed to speed the
modification of mortgages held by the failed IndyMac Bank, which the
government seized last year. Bair has proposed expanding that program,
which would provide financial incentives to servicers to modify loans
and give them legal protection if they follow certain guidelines.
Both the Treasury and the Federal Reserve have been exploring ways to
make mortgages more affordable to help stimulate demand for housing. A
provision in the economic stimulus package provides tax credits to some
home buyers.
By far the most controversial proposal to break the loan modification
logjam would change bankruptcy law to allow judges to modify loans from
the bench - as they're able to do for all other forms of consumer debt.
This so-called "cramdown" idea has been floated several times since the
crisis began but has been vigorously opposed by the financial services
industry.
Lenders argue they would have to charge higher rates to offset the
increased risk that a judge would forgive part of a loan in bankruptcy
court. Proponents counter that the risk is no higher than for any other
form of secured credit subject to modification, and that any increased
borrowing cost would be relatively small.
But the proposal is getting another look. On Tuesday, Geithner told
Congress changes in the bankruptcy law "will be an important part of the
president's plan."
"At that same time, we want to do it very, very carefully," Geithner
testified, "because this is a delicate situation, complicated balance.
And we want to make sure we're not making the process worse as we go
forward."
M. Erik Clark
Borowitz, Lozano & Clark, LLP
100 N. Barranca Avenue, Suite 250
West Covina, CA 91791
www.blclaw.com
Office: (626) 332-8600
Fax: (626) 332-8644
Board Certified in Consumer Bankruptcy
American Board of Certification
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