Finding a Way to Stem Foreclosures Proves Tricky

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FEBRUARY 11, 2009

Finding a Way to Stem Foreclosures Proves Tricky
By RUTH SIMON
WSJ

The Obama administration provided few details about its plans to address the foreclosure crisis when laying out its economic-recovery program Tuesday, highlighting the challenges of creating a program that is fair and effective. The administration's efforts are being complicated by a weakening economy. Nearly five million families could lose their homes between 2009 and 2011, according to Moody's Economy.com. "The ground is shifting," said Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group. "We have a lot more job loss and a lot more pessimistic expectations on home prices."

Housing and Urban Development Secretary Shaun Donovan and Treasury Secretary Timothy Geithner will be meeting Wednesday to discuss possible approaches to the foreclosure crisis.
How the Stimulus Plans Differ One question facing the administration is how to win investor support for modification efforts while providing meaningful relief to borrowers. At a town-hall meeting Tuesday in Fort Myers, Fla., President Barack Obama suggested that he would propose legislation to make it easier for loan-servicing companies to ease up on troubled borrowers while taking steps that might win investors' support. Right now, he said, servicers are limited in their ability to modify mortgages that have been packaged into securities and sold to multiple investors. In addition, "the borrower is going to have to probably -- if they get some assistance -- agree to give up some equity once housing prices recover," the president said.

Another challenge is determining who should get help. In Fort Myers, those facing foreclosure aren't just local residents hurt by job losses, but also real-estate speculators. Another worry is moral hazard, or how to help those truly in need without encouraging others to fall behind on their payments. Government officials are also expected to create national standards for loan modifications that would be adopted by Fannie Mae and Freddie Mac. But there is little data on what types of workouts are most cost-effective. Data released in December by federal banking regulators show that more than 40% of borrowers were at least 60 days past due eight months after their loan was modified. Critics say redefaults are so high because mortgage companies aren't doing enough to make payments more affordable.

Forty-seven percent of loan modifications completed in November resulted in higher payments for borrowers, typically because unpaid interest and fees were added to the loan balance, according to a study by Alan M. White, a professor at Valparaiso University Law School in Indiana. Coming up with an effective modification is complicated by the fact that many troubled borrowers also have home-equity loans or credit-card debt, auto loans or other obligations that can make it difficult to afford even a lower mortgage payment. Other borrowers may be able to afford a modified payment, but lack the reserves to deal with unexpected bills.

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With home prices tumbling, some analysts have been pushing for mortgage companies to reduce loan balances. Borrowers whose loan modifications include a principal reduction are less likely to redefault, according to an analysis by Credit Suisse, but mortgage companies have thus far been reluctant to write down loan balances. A focus for the government has been on how to determine the "net present value" of homes. Government officials think that if they can agree on a common metric for determining a home's value, they can expedite how the loan is modified.

Printed in The Wall Street Journal, page A2

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