And Phoenix, and Miami, and Los Angeles, and Las Vegas … and all communities drowning in foreclosures.
On Wednesday, Obama announced his admini-stration’s plan to stabilize the housing market. The stock market didn’t love the plan, but it didn’t hate it either, the Dow closing even. I’m sick, sad, and sorry that the country is in the mess we are in, but I understand that drastic action has to be taken even if dastardly, irresponsible people benefit. I can see House Republicans harping most loudly on this point, but as their squawking increases, so does their irrelevance.
In the meantime, Obama laid out a plan with a good amount of detail (unlike Geithner’s dreamscape last week) that will have a three-prong approach to curbing the foreclosure epidemic:
- Incentives to lenders to refinance loans to homeowners who are current but who are paying relatively high interest rates and cannot refinance due to loss of equity in market downturn.
- Incentives to lenders to adjust loan terms for at-risk homeowners (i.e., lowering interest rates, extending payment periods, lowering principle) with the goal of bringing monthly payments to 31% of the borrower’s monthly income.
- $200 billion capitalization of Freddie Mac and Fannie Mae so that these institutions can provide increased mortgage backing.
Obama is also asking Congress to pass legislation enabling bankruptcy judges alter mortgage terms. Says the New York Times:
The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before.
The plan is estimated to help nine million homeowners. The Wall Street Journal editorial page has already characterized Obama’s plan as a handout to the undeserving. The page cites delinquency rates on mortgages that were renegotiated via previous plans in the last fiscal year, quoting the Office of the Comptroller of the Currency and the Office of Thrift Supervision:
The number of loans modified in the first quarter that were 30 or more days delinquent was 37 percent after three months and 55 percent after six months. The number of loans modified in the first quarter that were 60 or more days delinquent was 19 percent at three months and nearly 37 percent after six months.
BUT … the WSJ goes on to admit (my bold):
Those who favor Mr. Obama’s plan say that many of these modifications haven’t lowered monthly payments the way the new plan does. True, and the more taxpayer dollars are spent subsidizing a particular borrower, the more affordable a loan becomes.
Furthermore, the second report by the Congressional Oversight Panel [COP], one of the entities overseeing administration of TARP, discusses some of the problems with previous programs to modify mortgages, like the Streamlined Modification Program:
The Streamlined Loan Modification Program (SMP) is an entirely voluntary program. … Its key feature is a 38% front-end debt-to income (DTI) target for modifications. … Litton Loan Servicing, a Goldman Sachs affiliate, uses 31% DTI as its initial target, FDIC has proposed a general modification program using a 31% DTI target, and Bank of America/Countrywide’s settlement with the state Attorneys General requires use of a 25%-34% DTI standard. Indeed, the GSEs’ [Freddie Mac & Fannie Mae] own initial underwriting guidelines suggest a maximum 25%-28% front-end DTI. Moreover, most loans already have a front-end DTI of less than 38%. Only around 10-15% of prime and alt-A and 25-30% of subprime are already above this threshold.
COP was most concerned about efforts Treasury had (or, actually, had not) made in administering TARP to stem foreclosures. Treasury responded by touting the “breakthrough” SMP, which was voluntary, and did little to significantly modify mortgages to avoid foreclosures. The COP report continues:
A recent study of loan modifications found that 23% result in higher monthly payments and another 23% result in no change in the monthly payment, while most of those that decreased payments did so by less than $100/month. Not surprisingly, failure rates on modified loans are high.
So when we start hearing soundbites railing against repeated defaults and screaming that mortgage modification doesn’t work, remember the context of these failures.