Obama Mortgage Rescue Program Seen As Failing, Possibly Making Things Worse

[democracy1st]

U.S. Loan Effort Is Seen as Adding to Housing Woes


By PETER S. GOODMAN
Published: January 1, 2010

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Kevin Katari, managing member of Watershed Asset Management contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”

The Treasury Department publicly maintains that its program is on track. But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.

In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.

Whatever the merits of its plans, the administration has clearly failed to reverse the foreclosure crisis.

In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million.

Mark Zandi, chief economist at Moody’s Economy.com argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”

From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.

Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.

Under the current program, the government provides cash incentives to mortgage companies that lower monthly payments for borrowers facing hardships. The Treasury Department set a goal of three to four million permanent loan modifications by 2012.

“That’s overly optimistic at this stage,” said Richard H. Neiman, the superintendent of banks for New York State and an appointee to the Congressional Oversight Panel, a body created to keep tabs on taxpayer bailout funds. “There’s a great deal of frustration and disappointment.”

As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.

“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”

But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.

In Lakeland, Fla., Jaimie S. Smith, 29, called her mortgage company, then Washington Mutual, in October 2008, when she realized she would get a smaller bonus from her employer, a furniture company, threatening her ability to continue the $1,250 monthly mortgage payments on her three-bedroom house.

In April, Chase, which had taken over Washington Mutual, lowered her payment to $1,033.62 in a trial that was supposed to last three months.

Ms. Smith made all three payments on time and submitted required documents, Chase confirms. She called the bank almost weekly to inquire about a permanent loan modification. Each time, she says, Chase told her to continue making trial payments and await word on a permanent modification.

Then, in October, a startling legal notice arrived in the mail: Chase had foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)

“I cried,” she said. “I was hysterical. I bawled my eyes out.”

Later that week came another letter from Chase: “Congratulations on qualifying for a Making Home Affordable loan modification!”

When Ms. Smith frantically called the bank to try to overturn the sale, she was told that the house was no longer hers. Chase would not tell her how long she could remain there, she says. She feared the sheriff would show up at her door with eviction papers, or that she would return home to find her belongings piled on the curb. So Ms. Smith anxiously set about looking for a new place to live.

She had been planning to continue an online graduate school program in supply chain management, and she had about $4,000 in borrowed funds to pay tuition. She scrapped her studies and used the money to pay the security deposit and first month’s rent on an apartment.

Later, she hired a lawyer, who is seeking compensation from Chase. A judge later vacated the sale. Chase is still offering to make her loan modification permanent, but Ms. Smith has already moved out and is conflicted about what to do.

“I could have just walked away,” said Ms. Smith. “If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened. God knows, I never would have wanted to go through this. I’d still be in grad school. I would not have paid all that money to them. I could have saved that money.”

A Chase spokeswoman, Christine Holevas, confirmed that the bank mistakenly foreclosed on Ms. Smith’s house and sold it at the same time it was extending the loan modification offer.

“There was a systems glitch,” Ms. Holevas said. “We are sorry that an error happened. We’re trying very hard to do what we can to keep folks in their homes. We are dealing with many, many individuals.”

Many borrowers complain they were told by mortgage companies their credit would not be damaged by accepting a loan modification, only to discover otherwise.

In a telephone conference with reporters, Jack Schakett, Bank of America’s credit loss mitigation executive, confirmed that even borrowers who were current before agreeing to loan modifications and who then made timely payments were reported to credit rating agencies as making only partial payments.

The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”

Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.

“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”

A good question, Mr. Geithner conceded.

“What to do about it,” he said. “That’s a hard thing.”



http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp=&pagewanted=all

[Warpy]

1. Geithner is an elitist and a fool

and will never be able to come up with anything that isn't a failure in the long term. He's as much a prisoner of short sighted corporatist dogma as any Republican is and all his "solutions" will be too little, too late for real human beings.

The only thing that will provide relief for any of us is rising wages, preferably created by rebuilding industry and infrastructure, but the wealthy can't be bothered to risk anything they stripped from the rest of us over the past 40 years and the government is too timid to strip it from them via taxes.

Until the power elite start to invest in our own country instead of in offshore countries, things will only get worse.

[Stinky The Clown]

2. Amen!

[FLAprogressive]

3. Yep!

[Confusious]

9. Geithner is a genius!

Well, in his own mind. Just look at what he's done for the economy! (Wall Street)

BTW, for those impaired

:sarcasm:

[anonymous171]

30. +1000

[DJ13]

4. Asking nicely is an invitation to being taken advantage of

The WH and Treasury should have put teeth into it, with serious consequences for the banks if they fail to move everyone into lower mortgages.

[pissedoff01]

5. The worst is yet to come

[democracy1st]

23. agreed and listening to Geithner talk about his concerns for the taxpayer is pathetic!

[riskpeace]

6. I refied my underwater mortgage under this program.

My monthly payment did go down by about $200. But since I did not have available cash, by rolling the closing costs into the new mortgage, I just got more upside-down for less money a month. I'm no fiscal genius, but it seems like Goldman Sachs and the foreign banks who got the AIG bailout money got a better deal from my government than I did.

[midnight]

8. Did you qualify because of a loan via frannie mac?

[riskpeace]

13. Yes, it was through Freddie.

I have good credit and income but the banks would not do the refi, because the mortgage was for more than the current value of the house. The bank that processed the refi for Freddie told me it was part of the Making Home Affordable program. That's what I thought was odd -- the government was helping me to get more underwater on the mortgage, albeit while helping to lower my monthly payment. That makes about as much sense as allowing the same banks that were bailed out with my tax money turn around and charge me 30% credit card interest.

[still_one]

10. Was your mortgage more than what you could sell your house for? /nt

[riskpeace]

14. Yes, besides I live in Florida.

You can't sell a house regardless of the mortgage. If I were to put my house on the market, the For Sale sign would just become a handy place to hang holiday decorations. I could change them with the holidays and the changing of the seasons.

[notadmblnd]

20. I would say that there are very few people who are not upside down on their mortgages

My sis just bought a house in a short sale. The asking price started out t 125,000. No offers came in for the owner until my sister placed one for the house. She offered 85,000. It took the bank 6 months but they decided to accept the 85,000 offer. When the appraiser went out, the house only appraised for 91,000. Go figure.:shrug:

[midnight]

7. Wow, I had no idea that this relatively modest bailout for main street could

be so hamstringed.... Maybe the program could allow main street not to be answerable to anything, and then things could get moving towards some relief....

[AllentownJake]

11. The program is fucking stupid

If you couldn't afford the house before going for the program you can't after wards. The President is doing all he can to keep Real Estate prices as artificially high as possible.

This is like after the dot.com bust the government trying to prop up the price of Pets.com.

[Mojorabbit]

26. Not really

there is a subset out there that would be fine if the mortgage was extended by some years and the monthly payment was lowered.

[AllentownJake]

36. A minority that doesn't need to be focused on

I'll stand by my comments. The program is a farce and the President is trying to prop up deflated assets to their bubble prices.

[Phoebe Loosinhouse]

12. If they really wanted to help people, they would address the major issue

of EQUITY LOSS. Almost a quarter of homeowners are upside down and paying unaffordable mortgages for houses worth less than the mortgage amount.

I'm no genius, but what I would do is create a program based on a refinance of a first mortgage based on the current appraised value. I would put the remainder in a silent second mortgage to the US Gov't with no payment due until sale of the house. This would: make mortgages affordable and keep people in their homes and remove the encouragement for people to walk away from devalued homes because they feel like they are chumps for jumping through hoops to pay more than a house is worth anyway. The cost to the government is whatever the remainder of old value minus new value is. It will be less than what they are paying the banks to do nothing.

In time, due to inflation alone, houses will rise once again to meet the old mortgage amount - although Japan has still to this day not matched the inflated amounts of their 1980's real estate bubble, so that is not a guarantee.

[AllentownJake]

15. That would require banks writing down assets

and that would result on them not meeting reserve requirements, which would unwind the entire fraud they have been putting support beams around for 2009.

It will coming crashing down sooner or later, hopefully sooner rather than later. The more they throw shit up in a haphazard attempt to "save" the system, the bigger the fallout when it crashes.

[Phoebe Loosinhouse]

17. Actually, it still props up the banks by having the Gov't underwrite the difference

That's exactly why I constructed it the way I did.

I actually wouldn't mind if the banks had to eat the difference themselves if it wouldn't crash the whole system because they fomented the whole crisis in the first place by throwing underwriting standards to the winds. We would have never HAD the real estate bubble but for them. In particular, they allowed every halfwit and his brother become "real estate investors" by throwing away the old requirement of 15-20% down. At the height of the bubble somewhere between 1/4 and 1/3 of all mortgages being written were for "investors".

[girl gone mad]

21. Cramdowns should have been allowed.

Many experts told the government that without a provision for cramdowns, any mortgage rescue program would fail. The banks balked at the idea.

Guess who congress and the administration listened to?

[Bluebear]

25. you said it

[cbdo2007]

29. The loss of equity isn't a paper amount for most people though. It's a fictitious

amount that they think they've lost based on the current value of homes.

The loss of equity is only occurring for people who have sold their houses while the market is down. This shouldn't be absorbed by the government or the banks unless you also think they should get the gains in equity that people receive selling their houses. Otherwise that turns the entire financial system on its head with no risk for bad investments yet big wins for good investments. This is ironically one of the problems on Wall Street now with stocks is that the largest firms are conducting transactions where they have almost no risk and laughing all the way to the bank.

I don't have a better solution at the current present time right now but I don't think the major issue in the housing crisis is Equity Loss, since Equity Loss is something that is dependent on how the market is doing at the time someone wants to sell. You could have two next door neighbors who both bought their houses on 1/1/2007 for $250,000. Right now they could only sell for $200,000 if they wanted to but this is only equity loss to the one who wants to sell now because he can't afford the payments.

Loans were the major problem here (and appraisals being part of the loan process are a huge scam) and we need to instead fix the lenders so that they are responsible for the bad mortgages they've given out over the years and make them eat much of this. Maybe have them lower certain interest rates to 1% for people who bought under certain circumstances or are going through financial hardship? This would then lower their payments while not affecting the house prices, which will recover.

[ljm2002]

32. I disagree with your argument that equity loss is fictitious...

...it certainly is not in my case. I put a reasonable down payment on my house, never borrowed against it, always paid the mortgage on time. The equity in the home was cash that I paid up front. Now, with the housing market crash, I am under water. I owe more than the home is worth, by about $75,000 or so -- more than the original down payment I made. So my cash up front has become negative equity and I can't sell it and I can't move should I wish to. Also, if a big repair were to come up, I would not be able to borrow against the house to finance it.

In no way is that loss of value fictitious.

Now it's true that the housing market goes up and down, as a general rule. But what we had here was a feeding frenzy that was orchestrated by the same financial geniuses who brought the international economy to its knees. And they get relief, but those of us who got royally screwed get none. This was not a normal market fluctuation, this was massive fraud, and the banksters got away with it.

[cbdo2007]

33. You are correct that I may be using the wrong term here...."equity loss"

You're right that you do not have as much "equity" in your house so you in fact do have "equity loss" but you don't actually have a monetary loss, you have an investment that has lost value and you may need to hold on to it longer than you originally planned or longer than you want to, to get your equity back and then start gaining value. If you sell now you would indeed have a major monetary loss but that's a good reason for you not to sell. I just had to stay in my house 3 years longer than I wanted to because I didn't want to take a loss and still my gain wasn't as large as I was thinking when I bought the house 10 years ago.

Now, I know I'm not some financial expert or anything, just trying to respond to the original statement that "equity loss" was the major problem here. I do acknowledge that "equity loss" is a problem for people such as yourself, but I dont think it was the major problem here or that the solution would include somehow dissolving the equity loss that people are assuming. I'm just saying that if equity loss is the major problem and we make the govt. or business responsible for that equity loss then they will also come after those people who had equity gain during the housing bubble by saying that was unfair then as well.

I do know that I'm not really good at explaining myself, so I apologize if your head is spinning around right now. Let me try to give an example though. I have some friends in Phoenix that bought during the housing bubble and within 2 years their house literally "doubled in value". So, they used half of their profits as the downpayment to buy a little bit more expensive house and banked about $100,000. They were living the high life for a few years then, throwing money around all over the place and of course now, like you, they owe a sh*tload more on the house than it is worth. I do feel sorry for my friends now, but I dont think the govt or the banks should have to take a loss here any more than they are entitled to the gain the housing bubble afforded my friends either.

Rather, if the bank would give them a lower mortgage on their house, at an extremely low rate of like 1% to lower their payment, they will stay in the house and have lower payments while still letting the market decide the actual value of their house. I agree with your last statement there - the banks shouldn't have gotten the relief they did. They caused this mess and they caused the abnormal market fluctuation by giving loans to people who couldn't afford them and always encouraging people to buy bigger and more than they could really afford.

[ljm2002]

37. Thanks for your reply...

...and I understand what you're saying.

My point remains, what happened was due to fraud, and when fraud occurs those who are hurt by it should be able to get some relief. We can all come up with anecdotal stories of all those people who played the housing market and who in our eyes do not deserve much if any relief. But what about the banksters with their record bonuses, who still refuse to work with people to help them stay in their homes? And another question: what makes their "equity" or "positions" any more real than yours or mine? Nothing, that's what. It's more of a game for them than it is for us -- in fact, more so, since the games they play are with other people's money. Yet somehow when their fraud is exposed, they get more money thrown at them.

It's funny, people's "fairness radar" always gets activated when it comes to their friends or neighbors who played the housing market, but not when it comes to the fat cats at the top. Maybe it's because they are by and large unknown, faceless men in suits, so it seems more abstract somehow.

I reserve my outrage for the fat cats, who engineered the whole thing and who so far have gotten away with their massive theft. Make no mistake, they stole from all of us, and one day people will wake up to that fact. When that day comes, all their mansions and gated communities and private islands will not be enough to protect the bastards.

[cbayer]

16. democracy1st,

Please be aware that our posting rules limit copyrighted material to four paragraphs with a link.

thanks,

cbayer
DU Moderator

[democracy1st]

18. +1

[notadmblnd]

19. it's what happens when you give them a choice

it should have been mandated that the banks help. It was not, the banks have decided they make more money not helping.

[AzDar]

22. K & R

& :puke:

[bvar22]

24. Heck of a job, Timmy!!!!

"President Barack Obama said he has “complete confidence” in Treasury Secretary Timothy Geithner ..."


"Obama said Geithner has been making “all the right moves” ...


http://www.bloomberg.com/apps/news?pid=20601087&sid=aPNnF.2ezVaY

Heck of a Job, Timmy !!!

[G_j]

27. smartest thing he said:

A good question, Mr. Geithner conceded.

[Missy Vixen]

28. We're in the Making Home Affordable program

We can't seem to get our final paperwork, despite five months of "trial payments" and sending every piece of paper known to mankind. Repeatedly.

Senator Murray's office is now involved.

I wish I had five minutes on the phone with President Obama. Actually, I'd take even ninety seconds. I'd ask him why we helped him get into his new house, but he won't help us stay in ours.

:eyes:
:mad:

[Laelth]

31. Making things worse? Kinda like this "health insurance reform" bill he's trying to pass.

Please, Mr. President, focus on Supreme Court nominations and foreign affairs. You seem very good at those.

:dem:

-Laelth

[Greyhound]

34. No shit.

The fundamental problem remains that the massive fraud that the "deregulation" allowed inflated the price of housing beyond the economy's ability to absorb it. As we use averages to determine everything without regard to the numbers underlying the statistics, they break down into meaninglessness. Using the billionaire cliche, "if a thousand destitute people are gathered in a room and Bill Gates comes in, statistically everyone in the room becomes a mutli-millionaire" and that is where we are now.

Housing prices are dependent on the majority, or at least a sizable minority, of people being able to afford to purchase them. After 30 years of declining real wages we have hit the limit. A family of four grossing $50K just cannot afford $250K for a house, not if they have a car or two, doctor bills, the ever-increasing "contributions" to "public" schools, and the morass of unacknowledged real inflation, and so on, yet that family is expected to pay the lion's share for our society. Put another way, the minority that can afford multiple over-priced houses are too few to sustain the price of housing in the U.S.

The answer is as simple as it is inevitable, there are only two options, wages have to rise significantly for working class people or real estate valuations have to fall. Everything that this administration has done has served only to exacerbate the problem, buying "toxic assets" at full price (on our dime) to protect the banksters and share-holders from taking the losses they earned, devaluing our currency to prop up the Wall Street Ponzi scheme, shitting on the public while financing the exodus of uber-capital to tax havens, and now indenturing our citizens to the insurance industry while ignoring the hyper-inflation they themselves created, reveals what their real agenda is and it ain't good for us.

[timo]

35. NO WAY

The government got involved and fucked things up??? WHO KNEW THIS WOULD HAPPEN?????