Housing Groups Fear Obama Plan Falls Short

President Barack Obama (WDCpix)

As many housing experts and consumer advocates applaud the arrival of the Obama administration’s new foreclosure plan, worries remain that the strategy isn’t broad enough to help the most vulnerable Americans keep their homes.

Advocates wonder, for example, if the plan’s financial incentives are large enough to entice the industry and homeowners to participate, if it can be executed quickly enough to be effective and if it does anything to tackle the mortgage-backed securities problem at the heart of the crisis. Also, the plan offers no direct help to renters, who constitute roughly 40 percent of the families affected by foreclosures, according to some estimates.

Illustration by: Matt Mahurin

As a result, housing advocates are approaching the plan with cautious optimism — and plenty of questions.

“They’ve got the carrots and sticks in there,” said Sharon Price, policy director at the National Housing Conference, an advocacy group. “The question is how quickly they can do it, and how cooperative the lenders and servicers will be.”

Fourteen months after the recession began, five months after the financial collapse, four months after arrival the Wall Street bailout, two months after a Detroit automaker rescue and 24 hours after President Barack Obama signed a $787 billion economic stimulus package into law, the White House has finally gone after the root cause of the economic downturn: the housing crisis.

It comes none too soon. Foreclosures nationwide topped 2.3 million last year, up 81 percent from 2007 and 225 percent from 2006, according to RealtyTrac, an online foreclosure database. In December, Credit Suisse estimated that, without government intervention, more than 8 million families could lose their homes to foreclosure by the end of 2012.

On Wednesday, Obama outlined his plan to reverse the trend, including $75 billion to prevent those on the brink of foreclosure from losing their homes and $200 billion to bolster Fannie Mae and Freddie Mac, the second-tier mortgage lenders tasked with buying debt from banks to keep the credit markets moving. The Obama plan also offers help to some homeowners who are able to pay their mortgages, but can’t refinance because their homes are worth less than they owe on them. These homeowners, under the plan, would become eligible to renegotiate their loans to take advantage of historically low interest rates. Obama also voiced support for a change in bankruptcy law that will empower bankruptcy judges to alter the terms of primary mortgages. That plan would require additional legislation from Congress.

“All of us are paying a price for this home mortgage crisis,” Obama said as he unveiled his plan in Phoenix. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself.”

Obama said the plan will help as many as 4 million Americans avoid foreclosure, while helping another 5 million homeowners survive the downtown more comfortably. The plan is scheduled to launch on March 4.

Advocates have welcomed the strategy with open arms, but retain concerns about its effectiveness. For example, the refinancing for “underwater” homeowners — those whose outstanding mortgages are larger than the worth of their homes — is available only to those with loans backed by Fannie and Freddie.*

Barry Zigas, director of housing and credit policy at the Consumer Federation of America, said Fannie and Freddie were moving to adopt such a program anyway. “It’s adopting a direction that those institutions were already heading in,” Zigas said.

Meanwhile, the $75 billion program for loan modifications would require lenders receiving help under the Troubled Asset Relief Program to participate. Yet there are legal questions about whether the government has the authority to force lenders — even those receiving federal help under TARP — to renegotiate the terms of mortgages, many of which have been snipped, bundled into complex securities and sold to investors across the globe. That is, if loan servicers — the companies that buy from lenders the rights to manage mortgages — can’t get investors on board, the loan modifications will never happen.

Jim Carr, chief operating officer at the National Community Reinvestment Coalition, said that investors would likely benefit from such modifications, but the program is strictly voluntary. “Investors don’t have to participate,” he said.

A similar sticking point might hinder the effectiveness of the $75 billion targeting the most at-risk homeowners. That component of Obama’s plan aims to reduce monthly mortgage payments to 31 percent of the borrower’s income, allowing the homeowner to stay put. But it doesn’t address the thorny securities issue, nor does it force investors to agree to the modifications. “It doesn’t get these loans out of these trusts,” Zigas said, “which is unfortunate.”

David Abromowitz, senior fellow at the Center for American Progress, said the Obama plan, by focusing on the root of the economic turmoil, “puts the emphasis in exactly the right place.” But he wondered if the monthly mortgage reduction would be enough to entice homeowners to participate. “It doesn’t seem to allow people to gain equity,” he said. “Will millions of them actually hang in for that?”

Another component of the Obama plan will grant $1,000 to servicers for each successful mortgage modification, and an additional $1,000 each year the borrower stays current under the new loan — up to three years. Advocates applauded the new financial incentives for the servicers, who have rued their absence in past foreclosure-prevention plans. But David John, a housing expert at the Heritage Foundation, wondered how servicers, who are already swamped with refinancing requests from solvent homeowners, could handle the flood of new demand. “They’re going to be overwhelmed,” he said.

The plan also offers $1,000 per year in principal reduction for some homeowners who keep up with their mortgage payments. The benefit will expire after five years. Yet there are questions about whether the $1,000 — less than most monthly mortgage payments — is an adequate incentive.

“Whether it’s enough is, in effect, going to make or break the level of participation,” Abromowitz said.

Then there’s the issue of renters. Price, of the National Housing Conference, said that between 25 percent and 40 percent of all foreclosures affect renters, many of whom receive little notice that the owner is behind on the mortgage. Many renters will lose their security deposits in the process. The National Low Income Housing Coalition issued a statement Wednesday warning that “increasing homelessness is a real possibility.”

All of which leaves housing experts hopeful but wary of the White House strategy to help struggling homeowners. “It’s a big step,” said Zigas. “The jury is out on whether it’s a big enough step.”

Indeed, it’s an environment in which optimism only extends so far. “Even with all of these efforts,” Price said, “we’re going to see a large number of families go into foreclosure in the next two years.”

*Note: An earlier version of this story indicated that this component of the plan would apply also to TARP recipients, which is not the case.