Foreclosure prevention will stand near the top of Barack Obama’s domestic priorities when he assumes the presidency. Obama has other housing-related items on his agenda, too. He says he wants to ease taxes on homeowners, and he inherits a controversial reform of the mortgage-closing process.
No one can guarantee success in the thorny task of reducing foreclosures. Obstacles stand in the way of getting government entities and private businesses to move in the same direction instead of working at cross purposes. The main way to prevent foreclosures is through mortgage modifications, such as rate reductions, forgiveness of principal, and extending the ultimate payoff dates of loans.
During the campaign, Obama said his Treasury and Housing departments would “more aggressively modify the terms of mortgages.” He said the feds would work with the states “to coordinate broad mortgage restructurings.” People in the industry take this to mean that Obama wants government and business to draw up widely accepted rules to decide who gets a loan modification and who doesn’t. That would constitute a break from the current system, in which loan-modification decisions are made case by case — a time-consuming process.
Mortgage experts say it’s necessary to devise a set of rules for mass modifications but that it will be fiendishly difficult to do. And that’s just from a technical standpoint. Then there’s the political angle: When it comes to who “deserves” a mortgage modification and who doesn’t, most voters know it when they see it, even if they couldn’t flowchart the decision. Any computerized, rules-based system would result in some widows losing their homes, and some rogues keeping theirs — in both cases, undeservedly.
“The entire industry is struggling with the right approach,” says Carol Beaumier, executive vice president with the risk-consulting firm Protiviti, where she heads a task force working on the mass-modification conundrum. “Probably one of the complicating issues right now is trying to get a sense of where the new administration might go. So for any institution looking to do something voluntarily, it’s a little bit of a balancing act.”
Government and businesses have worked together on foreclosure prevention, with results varying from so-so to abysmal. The Department of Housing and Urban Development introduced a program, called FHA Secure, that would allow delinquent homeowners to refinance out of ARMs and into FHA-insured loans. HUD estimated that the program could help 240,000 families; only 661 families got FHA Secure loans in 2008. Another ballyhooed program, Hope for Homeowners, resulted in no loans — zero — in 2008. Congress is revising it.
The best-known public-private coalition is the Hope Now Alliance, which boasts 400 housing counselors taking an average of more than 3,000 phone calls daily. The alliance sends letters to homeowners who have fallen behind on their mortgage payments, and only one in five reply. “It does give you the magnitude of the noncontact borrower,” executive director Faith Schwartz says.
The track record isn’t good for people who do get mortgage modifications. Of the people who got their mortgages modified early in 2008, more than half were delinquent on their mortgages six months later, according to John Dugan, Comptroller of the Currency. Sheila Bair, chairman of the FDIC and author of an aggressive modification plan for IndyMac bank customers, criticized the comptroller’s study for not distinguishing “sustainable modifications versus cosmetic modifications.”
Mortgages are not the bailiwick of the incoming Housing Secretary, Shaun Donovan, who most recently was New York City’s housing commissioner. Donovan’s expertise lies in development of affordable housing in cities. Obama has directed Donovan, Bair and incoming Treasury Secretary Timothy Geithner to come up with a foreclosure-relief plan by March 15.
Obama has made a couple of other proposals to reduce foreclosures. He wants lenders to wait 90 days before proceeding with foreclosure if the borrower is negotiating. He wants bankruptcy judges to be able to modify the mortgages of debtors in Chapter 13 repayment plans — a power known as cramdown. Lenders had opposed cramdown, but with banks receiving hundreds of billions of dollars in bailout money, they’re in no position to fight it.
Obama has two housing-related tax proposals. One has to do with income taxes and the other has to do with property taxes.
Millions of homeowners pay interest on mortgage debt, but don’t get tax breaks for it because they can’t or don’t itemize deductions. Obama proposes a 10 percent tax credit on mortgage interest for nonitemizers. The tax credit would be refundable, meaning that filers could get the money even if they don’t owe any income tax.
Obama proposes giving up to $25 billion to the states so they could distribute money to local governments that otherwise would have to raise property taxes to pay for essential services such as police, fire and schools.
In November, the federal housing department revised the regulations surrounding the good faith estimate of closing costs, or GFE. That’s the document that itemizes the estimated fees and taxes on a mortgage transaction. Starting by the beginning of 2010, at the latest:
- The GFE will be standardized into a three-page document.
- Estimated fees will have to be accurate.
- Brokers will have to disclose their compensation.
The National Association of Mortgage Brokers has filed a lawsuit to try to block disclosure of brokers’ fees in the form of yield spread premiums.
This particular bit of regulation — implementing the Real Estate Settlement Procedures Act, or RESPA — has been surrounded by contention since at least the Clinton administration. Administrations tried to amend the regulations repeatedly, but special interests — from title insurers to bankers — thwarted the efforts. The new rules probably could have been released only by a lame duck administration. Now it will be up to the new administration to defend them in court.