Obama’s $75 billion mortgage rescue plan doesn’t address the danger that more homeowners whose equity has evaporated might just walk away
The Obama Administration’s $75 billion homeowner-rescue plan offers a lot of help to people in imminent danger of losing their homes. It does far less for those who are deep underwater on their mortgages but have the wherewithal to keep making their monthly payments. And that could be a problem-not only for those homeowners themselves, but for the banking system and the economy in general.
Here’s the dilemma: Many homeowners owe more on their mortgages than their homes are worth, and-rightly or wrongly-increasing numbers of them may decide to give up and mail in the keys. The taboo against reneging on debts already shows signs of fading in hard-hit markets like Phoenix and Las Vegas. More abandonments would increase losses for lenders while damaging the vitality of neighborhoods.
There’s not much in the Homeowner Affordability and Stability Plan announced on Feb. 18 to deal with this looming problem. Provisions to reduce monthly loan payments for homeowners who are struggling don’t prevent these so-called “voluntary foreclosures,” since in many cases the payments already are affordable. The most effective way to keep underwater homeowners from walking away en masse would be a big writedown of the principal they owe. That would give them positive equity in their homes-or at least the hope for it once prices begin creeping upward again-and with it, a reason to stay put. Although the Obama plan permits principal writedowns-and even pays off up to $5,000 of principal for homeowners who remain current on their payments-they aren’t required, or even central to the proposal….
….Coasts Hit the Worst
Moreover, “private-label” mortgages that lack Fannie or Freddie’s backing-particularly in California and the Northeast, where home prices are higher and subprime mortgages more common-aren’t eligible for Fannie and Freddie refis at all. “Where the markets have been hardest hit on the coasts, where private mortgages are the biggest, this program won’t really help,” says a fixed-income portfolio manager for a major mutual-fund management firm.
The senior Administration official said the 105% cap seemed advisable in part because re-default rates tend to rise with high loan-to-value ratios. And the government excluded private-label loans from the refinancing program because it little or no authority to dictate rate changes where government-affiliated entities don’t provide guarantees.
Obama’s plan is broader and stronger than Hope for Homeowners, the unwieldy, mostly voluntary program passed by Congress last summer. On the other hand, that’s not saying a lot. Hope for Homeowners has refinanced a microscopic 25 mortgage loans so far. Even a thousandfold improvement over that would still constitute failure for the Obama Administration. That’s why this plan may require some changes in the months ahead.