Obama's $75 Billion Housing Gamble
On Wednesday the Obama administration put forth the most ambitious plan to date in the ongoing effort to stem home foreclosures. But the wide ranging blueprint essentially amounts to a bribe to lenders enticing them to modify loans for struggling borrowers. That begs the $75 billion question: will lenders take the bait? If past is prologue, the outlook isn't terribly encouraging.
Lenders have long resisted any type of loan workouts in any economic environment. The process is costly, inefficient and often results in foreclosure anyway.
As a result previous attempts to halt foreclosures have met with little success. The Hope for Homeowners program that was part of housing legislation last summer was supposed to help 400,000 homeowners. So far about two dozen loans have been modified. And the redefault rate for mortgages modified in the first quarter of 2008 was 53% after six months, according a study from the Office of the Comptroller of the Currency. Because borrowers are often far behind on loans when they are modified, often the new terms result in higher monthly payments for them.
This latest measure seeks to go a step beyond those previous voluntary lender initiatives by throwing an exceptional amount of money toward the housing problem underlying much of the current economic slump. The hope this time is that by sweetening the deal for lenders the government can keep people in their homes and stabilize home prices. With cratering home prices and weakening bank balance sheets, there may be more motivation for banks to play ball. Plus banks taking Treasury money may have no choice. There are few ways to punish the vast majority of mortgage lenders that aren't taking government assistance, but Obama has come up with a controversial plan to create at least one club: Give bankruptcy judges the power to force lenders to do loan workouts. That will apply to homeowners already in bankruptcy proceedings and the measure requires congressional approval.
To win support for that idea, the Obama administration is throwing in a few more programs for good measure resulting in a three-pronged approach: help some borrowers with high interest loans refinance into new deal terms; pump more money in the government sponsored entities Fannie Mae and Freddie Mac to assure more money for loans; and get lenders to modify loans for homeowners in or on the verge of foreclosure. This time the plans also include borrowers whose mortgages are more than the value of their homes, but haven't missed payments. That avoids the messy problem of inducing homeowners to skip their bills. And it allows Freddie and Fannie to back riskier loans than before -- targeting homeowners who have no equity in their homes. It could stabilize home prices, while leaving taxpayers on the hook for the tab.
Details on how all this will work, including a new mass loan modification template, is coming by March 4th. It will take a little longer to sort out whether $75 billion is money well spent. The administration has speculated the plan could help up to 9 million homeowners with little supporting evidence. The scary news is that even if the plan works, it could do little to revive the housing market, which lost $3.3 trillion last year alone.