New bailout plan called inadequate
Industry observers say the program announced by the Bush administration will help only a small percentage of people in danger of losing their homes. But some economists call it an important first step in addressing the crisis.
The foreclosure bailout plan announced today by President Bush and Treasury Secretary Henry Paulson won't go far enough to help the 2 million Americans in danger of losing their homes, industry observers say.
"It's like fighting a forest fire with a squirt gun," says Liz Wolff, national research director for the Association of Community Organizations for Reform Now (ACORN). "It doesn't cover enough people, and it leaves too much discretion in the hands of the lenders" in determining who qualifies for an interest-rate freeze, she says.
Help for small fraction of troubled borrowers
The voluntary plan announced by Bush after a meeting with lending officials was targeted to those subprime borrowers who have not yet defaulted on their mortgages, who are living in their house currently and can afford to pay the mortgage they have now before it resets.
It does not help people who will default on a second home, real-estate investors, or the people who have already defaulted on their mortgages or whose loan will reset before January. (For additional details on the plan, read this story.)
The Center for Responsible Lending estimates that the plan will help only about 145,000 families, or 7% of subprime borrowers. Mark Zandi, chief economist for Moody's Economy.com, was more optimistic, putting the number at about 250,000. Critics say it might help far fewer, depending on how the plan is implemented.
"The plan would still require a case-by-case analysis of 2 million loans," including the borrower's current credit scores, a review of the home's loan-to-market value and the homeowner's other debt, says Howard Glaser, a former chief legal adviser to Housing Secretary Andrew Cuomo under President Clinton who now heads Glaser Group, a consulting firm. That could take time, he says, more time than some borrowers have.
Moreover, the freeze of up to five years outlined by Bush wouldn't automatically apply to all eligible borrowers, Glaser says. And it relies largely on borrowers to learn about the HOPE NOW program and call 1-888-995-HOPE or their lender. To date, analysts say, that kind of borrower contact has resulted in very few loan modifications.
"I would be very surprised if down the road three or four months you saw a significant impact (from this program) to mitigate the foreclosure crisis," Glaser says.
Indeed, many analysts see little difference between this program and what lenders are already doing with little success.
A recent Moody's Investor Survey of 16 loan servicers who handle roughly 80% of the subprime servicing market showed that they had modified only about 1% of their serviced loans that experienced resets in the months of January, April and July 2007.
And without public accounting of the number of modifications the industry is performing, critics say there might not be incentive for lenders to do many more, despite the huge costs associated with taking back a property. "If they don't do that in a very transparent way … then we're right back to where we were before," says Kathleen Day, spokeswoman for the Center for Responsible Lending. "We keep hearing that the industry is going to be a part of this, and it doesn't happen."
Given the long time lines for approvals of loan modifications and refinancing, many would like to see a mandatory ban on foreclosures for people who have already contacted their lender. "We would like a moratorium on mortgages for 90 days or longer so people will have time to get through the process" of working out new payment terms with their lender, Wolff says.
Still, economists characterized this as an important first step, while stressing that more reform is needed, including financial assistance to mortgage counseling organizations, reforms to the Federal Housing Administration, and reforms to Fannie Mae and Freddie Mac.
Doug Elmendorf, an economist and senior fellow at the Brookings Institution, says another solution might be to use taxpayer dollars so the FHA could "sweeten the deals they offer" when guaranteeing mortgage refinancing so more homeowners can get assistance.
However, some argue that even if Bush's plan doesn't help everyone who could be helped, it should bring ease to the financial markets, which will help consumers in the long run. "It will get the credit markets back up and running," because it will reassure investors who have been buying the loans on the secondary market, says Mark Vitner, senior economist with Wachovia Corp. in North Carolina. "Until you bring that liquidity back, mortgages will be more expensive for everyone.