President Obama promised this week to reconnect to the concerns and needs of Americans who are suffering from the recession. One important way to do that is to help hard-pressed families hang on to their homes.
It’s not just the moral thing to do. It also would help avoid the spillover effects of the next expected round of defaults. Coupled with high unemployment, a coming surge in foreclosures is likely to further depress house prices. That would hurt an already fragile recovery and, in a worst case, could provoke a double-dip recession.
Unfortunately, advance word of coming changes to the antiforeclosure effort are not encouraging.
When the effort was announced nearly a year ago, the administration said it would help as many as nine million at-risk families keep their homes by the end of 2012 — by lower payments through loan modifications, mainly lower interest rates, or by refinancing loans for borrowers who have little or no equity.
Yet recent tallies show that through 2009, only 66,465 loans had been successfully modified, and through last November, 155,700 loans had been refinanced. That’s abysmal. An estimated 2.4 million borrowers are expected to lose their homes this year alone because of joblessness, negative equity and, in many cases, unaffordability as teaser rates expire on adjustable mortgages.
It would take 100,000 successful modifications a month, starting now, to significantly counter the threat that so many foreclosures would pose to the economy, according to estimates by Moody’s Economy.com.
As early as next week, the administration is expected to ease up on the paperwork requirements for a loan modification and to announce temporary assistance — probably low-cost loans or grants — to help unemployed people pay their mortgages. A loan would likely be tacked on to the mortgage, for repayment over time.
Those changes, however, would not correct the program’s biggest flaw: the current preferred way to modify a loan — reducing the interest rate — is of limited use to millions of so-called underwater borrowers, those who owe more than their homes are worth. Reducing the loan’s principal balance is more valuable because it lowers monthly payments and restores equity. Various studies show that having equity also reduces the likelihood of redefault on a modified loan.
Administration officials, however, have been unwilling or unable to persuade lenders to reduce the principal on underwater loans. One obstacle is that many troubled borrowers have two loans on their home, and conflicts exist between the first and second mortgage holders over who gets how much out of a loan whose principal has been cut. Several months ago, the Treasury Department detailed a plan aimed at resolving the conflicts, but lenders have yet to cooperate.
It is less clear why the refinancing arm of the antiforeclosure program has flopped. But for many borrowers, refinancing may not be worth the cost unless mortgage rates drop and stay low, which is not likely.
Treasury officials say that they continually review the antiforeclosure effort and consider changes. It’s hard to see what they need to convince them that it’s time to restore some equity to drowning borrowers.
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