Concealed amongst last week's news of bankruptcies and bailouts, was some important testimony in Congress about the failure of previous initiatives by the government and the mortgage industry to try and stem foreclosures by working-out distressed loans. Back in February when the Hopenow alliance was announced and dubbed "Project Lifeline" by the Bush Administration, this blog predicted (here) that it was unlikely to have much affect on foreclosures because the industry would be unwilling to modify loan terms, such as reducing the interest rate or even the amount of the principal of the loan. The initiative was touted by Treasury Secretary Paulson as "one more means of helping homeowners, and combined with the other parts of Hope Now's outreach, these initiatives can make a measurable difference." (refer here) Well, apparently not.
The author of a study on loan modifications from July 2007 through 2008 testified before the House Financial Services Committee on September 17. He concluded that:
The data show that while the number of modifications rose rapidly during the crisis, mortgage modifications in the aggregate are not reducing subprime mortgage debt. Mortgage modifications rarely if ever reduced principal debt, and in many cases increased the debt. Nor are modification agreements uniformly reducing payment burdens on households. About half of all loan modifications resulted in a reduced monthly payment, while many modifications actually increased the monthly payment. Finally, there is tremendous variation in the extent, if any, of payment relief offered by different mortgage servicers.The combined effect of dwindling refinancing activity and modifications that do not write down mortgage debt, and in many cases do not even reduce monthly payments, is to delay, but not prevent, large numbers of foreclosures. Given the continuing accumulation of loans in the foreclosure and real-estate-owned categories, the subprime crisis will be worked out only over many years through painstakingly slow repayment, foreclosure and disposition of properties.
If the author is right, the Project Lifeline initiative would seem to only prolong the period of declining housing prices and prevent a floor in prices from forming. Modifications that would prevent foreclosure need to take place or no effort at modification should be taken at all so that the market correction can run its course.
In October, the $300 Billion legislation to have the FHA support mortgage refinancing to up to 400,000 homeowners by insuring the new loans will take affect. Legislators at the hearing on September 17 questioned whether this program will have any greater affect on preventing foreclosures (refer here). The law does not require lenders to modify existing loans, as reported at the time (here).
With these efforts having failed, we come to the Treasury Department's proposal over the weekend that it have authority to buy up to $700 Billion in mortgage-related assets from financial institutions. What, if anything, does it do to prevent foreclosures? The original draft of the bill sent to Congress by the Treasury contained no provisions relating to foreclosures. In some new proposals, members of Congress have inserted provisions that would permit the federal government (1) to modify loans to prevent foreclosures; and (2) allow bankruptcy courts authority to modify loans in the course of bankruptcy cases filed by homeowners. Perhaps these more drastic measures to prevent foreclosures on the front-end would reduce the necessity for the bail-out of financial institutions on the back-end. What gets into the bill remains to be seen.
Comments