Even Federal Reserve Board chairman Ben Bernanke understands that the rapidly spreading housing crisis in the United States is going to require more than voluntary action by mortgage servicers, lenders, and investors to help homeowners. We at the Center for American Progress are delighted that the central bank chairman today signaled that he, too, supports some kind of federal effort to help homeowners help themselves—not least because the crisis is clearly spreading rapidly despite the efforts of the Bush administration-led HOPE NOW alliance to find voluntary solutions to the crisis.
Yesterday, the HOPE NOW alliance—the group of housing market participants convened by the administration to address the housing crisis—released data on their efforts to date. The alliance claims to have helped more than a million homeowners stay in their homes since July. But closer scrutiny of their numbers paints a much bleaker picture.
To their credit, alliance members have increased the number of workouts offered, but those workouts are still predominantly repayment plans rather than substantive modifications of loan terms. More often than not, repayment plans do not offer long-term relief to borrowers. As Federal Deposit Insurance Corporation chairwoman Sheila Bair noted, these new repayment plans “may be unsustainable for borrowers and lead to later delinquencies and contribute to ongoing borrower distress.” Bair stressed that “it is critical that borrowers have loans they can afford over the long term.”
Indeed, of the 1,035,472 borrowers offered workouts by HOPE NOW members, only slightly more than one in four were offered modifications. And even as HOPE NOW has ramped up its efforts to reach out to borrowers in trouble, modifications as a share of all workout plans remained largely unchanged from December to January.
For many borrowers offered repayment plans, those plans are simply a way for servicers to tack on additional fees and charges as they proceed down the path toward foreclosure. Foreclosure sales, already above 67,000 in January among HOPE NOW members, are on track to be one-third higher this quarter than in the third and fourth quarters of last year.
Despite the rhetoric that nobody likes foreclosures and that they are costly to servicers as well as borrowers, servicers have not made enough modifications to prevent loans from falling into foreclosure. Studies, including one cited by Bernanke earlier today, have pegged the cost to servicers of foreclosure at 50 percent of the amount of the original loan, yet if the servicers simply wrote down the mortgage balance by even half of that, in many cases, they would have a performing loan on their hands.
Part of the problem is that for all the administration’s efforts, they have pinned their hopes on voluntary efforts by servicers who are not concerned about the long term or the broader impacts of their workout decisions on borrowers’ neighbors and communities. “If you are going to modify the loan and keep the borrower in the house, the bias is to do that for a shorter rather than longer period of time,” acknowledged Washington Mutual Inc. Vice Chairman William Longbrake. “There’s a reluctance to do long-term modifications.”
The Center for American Progress has an answer to this problem—a solution that Bernanke in large part agreed today is probably the right way to go. CAP’s Saving America’s Family Equity, or SAFE loan program, is a solution that addresses this reluctance among servicers, lenders, and investors to make long-term modifications to qualified mortgage borrowers.
Instead of relying on the existing servicers to make necessary, sustainable modifications to loans, the SAFE plan calls for sales of loan pools at auction, in which the servicers would offer the loan pools in exchange for Treasury securities. The price of the pool would be at a significant discount to the face value of the mortgages, but likely above its liquidation value. This fixes investors’ losses in time and takes the servicers of the loans out of the picture.
Simultaneously, public and private entities participating in the SAFE loan program would buy up the discounted pools with the provision that loans already in default or under water would be refinanced into fully amortizing, fixed-rate mortgages based on the current value of the property with terms that would keep the borrowers in their homes. Our SAFE plan is modeled after the New Deal’s successful Home Owners’ Loan Corporation but leverages the capacity of existing government agencies and government-sponsored housing institutions to speed assistance to troubled homeowners rather than set up an entirely new entity.
The Center also boasts a second proposal, the Great American Dream Neighborhood Stabilization Fund, or GARDNS Fund, which would provide money to local housing authorities and non-profit organizations to buy foreclosed properties from banks and return them to productive use as affordable housing. Taken together, these two proposals can stabilize neighborhoods and restart frozen housing markets by significantly reducing excess inventory and moderating downward pressure on home prices.
Both measures would help the housing market find its footing, which in turn would help struggling homeowners cope with the downward spiral in housing prices and thus help the larger economy to recover again. These are steps that Congress is considering now, and we urge the administration to follow Chairman Bernanke’s lead.
Waiting for a new administration to consider these plans while servicers continue to make small changes to loans may well ensure the current housing downturn does indeed last another several years.
For more information about the Center for American Progress’ policies on the housing crisis, see: