WASHINGTON (AP) – Oct. 3, 2008 – The harsh reality for Murielle Montes and hundreds of thousands of homeowners who are behind on their mortgages is this: A $700 billion bailout of the financial industry will probably do little to help them avoid foreclosure.
On Friday, House lawmakers are scheduled to vote on the package, amid intense lobbying from President Bush and industry groups who say the measure is crucial for stabilizing the staggering U.S. economy.
But when it comes to foreclosures, the Treasury Department is only directed to “maximize assistance for homeowners” and write up monthly progress reports.
That’s not enough to help Montes, a 46-year-old nursing assistant, who faces foreclosure on the house she bought in Brockton, Mass., three years ago.
She has been working with a housing counselor to modify her loan since February, but hasn’t had any luck and received a foreclosure notice in August. Meanwhile, the value of her house has sunk from her purchase price of $330,000 to $250,000, she said.
“Where are am I going to sleep? Where are my kids going to go?” asked Montes, who immigrated to the United States from Haiti 20 years ago. The government, she said, “should try to buy the loan out so people can refinance … and everyone can stay in their house.”
But in many cases, the federal government’s hands could be tied – either because the mortgages are pooled into securities sold in pieces to other investors, or because homeowners don’t have the financial resources to stay in the property.
Within 12 to 18 months, roughly 40 percent of U.S. borrowers, or 20 million households, will owe more on their mortgages than their homes are worth, according to Deutsche Bank. The problem will be most severe in California, Nevada, Florida and Arizona, where housing prices soared and reckless lending practices were rampant during the housing boom.
That’s almost the same number of American households that are spending 30 percent or more of their income on housing, according to recent U.S. Census data. With little cash cushion or home equity, the slightest financial problem – an increase in gas prices, medical bills, or car repair – can put a family behind on their mortgage and into the realm of foreclosure.
“Only a small portion of problem loans,” can be saved, said Deutsche Bank analyst Karen Weaver. “It doesn’t always work … In some cases the lender is better off just taking back the property and just selling it.”
As lawmakers debate the massive rescue plan, many consumer advocates are upset that it would benefit the same Wall Street banks that provided funding for the explosion of subprime and other exotic loans, while making only vague promises to assist homeowners.
“It has been very difficult to get (the government) to put together a mandatory, comprehensive, immediate plan to rescue homeowners in the same way that they’ve put together a massive plan to rescue those who got us in this crisis in the first place,” said John Taylor, president of the National Community Reinvestment Coalition, a consumer group in Washington.
Even if the government does push aggressive efforts to modify troubled loans, it could take months to put such a sweeping effort in place.
Still, some housing advocates believe borrowers will have better luck with the government than with private mortgage investors.
“I would expect the government would be an easier entity to negotiate with than the current lenders who are trying at all costs not to take a loss,” said Mossik Hacobian, executive director of Urban Edge Housing Corp. in Boston, which has been trying to help Montes with her mortgage.
The government may well step up pressure on loan servicers – which collect and distribute loan payments – to make changes in loan terms such as reduced interest rates or lowered principal balances, said Credit Suisse analyst Rod Dubitsky.
But while the government would be the largest investor in mortgage securities, “they can’t dictate anything” unless they buy whole loans, instead of slices of mortgage securities, Dubitsky said.
Many in Washington and on Wall Street are hoping the rescue package will make more money available for mortgage lending, lower interest rates and make it easier for borrowers to qualify. This might help put a floor under falling home prices – which are down more than 16 percent nationally from a year ago – and lessen the severity of the economic downturn.
That would be welcome news for Rick Wendell, a 41-year-old electrician in Orlando, Fla. He and his wife are looking to rent out a room in their three-bedroom house. They are struggling to pay their $1,950 mortgage and property taxes because his wife lost her job earlier this year.
The Wendells bought their house 18 months ago for $245,000, but think it has dropped in value by at least $25,000.
“Unfortunately for me, I’m stuck with a house at a high price,” he said. “The people who have already purchased a home are stuck,” he said, noting that a federal bailout “might stimulate the economy, and my wife might be able to find a job.”
Consumer groups say the lending industry was ill-prepared for a sharp rise in foreclosures. And they blast the industry for relying on short-term repayment plans, which aim to help borrowers get back on track after missing a few payments, rather than reducing the principal balance or lowering the interest rate.
The Hope Now alliance, a Bush administration-backed mortgage industry group, said Thursday that the industry has performed some form of workout on 2.3 million loans since July 2007. About one-third of those were permanent modifications.
But on Monday, a group of state banking and law enforcement officials released a report that said nearly 80 percent of borrowers with subprime loans were not on track for assistance to avoid foreclosure as of May.
Paul Koches, general counsel of subprime mortgage servicer Ocwen Financial Corp., said a loan modification benefits both the borrower and the lender because losses on foreclosed homes are running at more than $100,000 per property. “It sure beats the alternative,” Koches said.
Nevertheless, the level of loan modifications varies dramatically in the industry, according to a Credit Suisse report released this week. Among 18 loan servicers, modification rates among subprime loans made since 2005 ranged from under 2 percent to nearly 18 percent as of August, according to the Credit Suisse report. Ocwen Financial had the third-highest level of loan modifications in the Credit Suisse report.
Still, many borrowers continue to have problems, even after a modification.
Roughly one-third of all loans modified in the third quarter of last year re-defaulted within 10 months, the Credit Suisse report said. However, that rate dropped to 15 percent among loans where interest rates were frozen and not allowed to reset at higher levels.
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