The Expectations Game and the Government’s Mortgage Plan

The plan for Fannie Mae and Freddie Mac to streamline mortgage modifications for troubled homeowners has already come in for some harsh criticism. Federal Deposit Insurance Corp. chairwoman Sheila Bair, in particular, has been outspoken in her opposition.

That’s important, because Bair is the leading proponent of massive restructurings of mortgages. She wants Treasury to move forward with using $40 billion to $50 billion in financial bailout money to guarantee as many as 3 million restructured loans. So far, the Treasury Department and the White House are resisting that idea.

Bair didn’t attend Tuesday’s news conference to announce the loan-modification program by Fannie and Freddie. She issued a statement saying it would fall short of stemming home foreclosures.

Under the Fannie and Freddie modification plan, homeowners at least 90 days delinquent would be eligible to have their monthly payment reduced to 38 percent of their gross monthly income, under certain circumstances. That would be accomplished mainly through interest-rate reductions and by extending the length of the loans.

The government remains a bit vague on the details. The worry among housing advocates is that the plan is being pushed as an alternative to Bair’s more sweeping proposal.

I had a different reaction — but it may reflect my generally low expectations for mortgage-loan modifications. The plan calls for paying servicers to do modifications, which I think is a great idea. These people aren’t motivated by altruism, and they usually get paid for foreclosing a home, not for working out troubled loans.

I also recognize that the program wouldn’t help a large swath of borrowers. But unless the government steps in with a huge, Depression-era program to buy up delinquent mortgages, or unless it finds some way to order investors to sign off on loan modifications, there’s only a patchwork of solutions out there?

Helping some people in small ways isn’t the worst thing in the world. Housing advocates, lenders and mortgage servicers all are getting better at loan modifications than they were, say, a year ago. That’s progress, however modest.

Tuesday night, I checked in with Ellen Seidman of the New America Foundation, who specializes in the financial services industry, to find out her reaction. Seidman, who closely follows loan modifications, said that people don’t really understand that the Fannie and Freddie plan is aimed at heading off foreclosures among prime borrowers — the next segment of homeowners in danger of defaulting on their mortgages. In that sense, the program has some merit.

Seidman explains on her blog today some of the reasons for the consternation over the plan, despite its attributes. She believes the negative reaction has a lot to do with way it was presented. She described the news conference as a “really inept rollout.”

From Seidman:

The rollout was marred (that’s being kind) by the Treasury trying to sell this for far more than it is, intimating that it is a substitute for aggressive action on a broader range of loans, including sub-prime and Alt-A loans and loans not yet seriously delinquent, such as the guarantee program that FDIC Chairman Sheila Bair has been pressing the Treasury to implement. The fact that Bair wasn’t around for the announcement, and the Treasury spokesmen literally ran out of the briefing room to avoid answering questions, didn’t exactly help the picture.

Despite the PR debacle, Seidman said the plan has merits, including breaking the logjam that has kept Fannie Mae, in particular, from doing a lot of loan modifications. If the loan modifications work well, and the agencies keep good records on successes and repeat defaults, that would offer strong evidence to convince lenders it’s in their interest to modify their loans rather than foreclose, she said.

All sorts of competing loan-modification plans are out there. Citigroup, JPMorgan Chase and Bank of America have their own variations. They’re all voluntary, and they all haven’t broken through the problem of redoing loans that aren’t in a lender’s portfolio, but are sliced into pieces and scattered around the globe in mortgage-backed securities.

Until investors begin buying into the loan-modification idea, don’t get your expectations too high for any particular program. Just consider each new rollout, however ineptly handled, as one more attempt to chip away at a problem that still seems as insurmountable as ever.