Federal mortgage help not working

In its latest report, the Congressional Oversight Panel notes that the programs initiated by the Treasury Department to help homeowners facing foreclosure have not been effective. Fewer than 200,000 people have been permanently helped by the programs so far. I do not think this should be a surprise to anyone.

What incentive do the banks have to help homeowners facing foreclosure? The government bailed them out and continues to offer help as more foreclosures pile up. Participation in all of Treasury’s programs so far has been voluntary for the banks. A new requirement that loan servicers explain to homeowners why their loan modification has been declined is not going to increase the number of modifications. New efforts to get banks to write down principal loan amounts to bring loans in line with actual house values has gained no traction, even with one out of four mortgages currently being upside down.

What incentive does a homeowner have to apply for help through these Treasury Department programs? With second mortgages, credit cards, car loans and other debt, most homeowners would still pay nearly 60% of their income towards debt service even with reduced first mortgage payments. If they do attain a “best case” 5-year payment reduction, the homeowner will probably still be upside down and looking at higher payments once again.

Lenders and borrowers both seem slightly confused by the trickle of modifications to existing programs and new programs that keeps coming from Treasury. No-one seems to know whether to try to modify a mortgage now or wait a few months to see if something better comes along. Homeowners have seemingly been stuck in a non-stop cycle of applying to lenders for help, being denied after multiple delays and then being encouraged to apply for help again under a new or changed program, only to be denied yet again.

Meanwhile, more and more homes are foreclosed upon. Housing prices seem to be stabilizing in parts of the country but are still plummeting in some major cities. And the banks are once again profitable thanks to the federal government bail-outs.

Effective government Mortgage help for homeowners?

Can the federal government really have much impact on the number of consumer mortgages that go into default? So far the answer would appear to be no, but the programs offered have been quite limited and not many homeowners have even qualified. The answer for the next round remains to be seen.

First there was the Making Homes Affordable program launched in 2008. Though the intentions were good the program showed the governments lack of grasp of the reasons home mortgages were going into default. The program targeted people with equity in their homes and who were current in their monthly payments. It encouraged lenders to refinance at lower interest rates and/or lesser principal amounts to lower payments to a more affordable level. With the drastic drops of property values and the rapid rise of the unemployed, most folks in mortgage trouble were left out in the cold. There was also very little incentive for the banks to take part in this program.

New provisions have now been added that try to make up for some of the original shortfalls. Eligibility now extends to properties valued at least 15% less than the amount of the mortgage. The unemployed are also targeted. Lenders are encouraged to refinance with FHA guarantees at a new principal of 97.75% of the actual property value, getting people above water on their mortgages again. Another goal is have maximum monthly payments of 31% or less of the borrowers income. Banks are also encouraged to offer up to six months on reduced or furloughed payments to help those who are out of work. Participation by lenders is still voluntary but some of the larger banks are showing signs of they think keeping people in their homes is better than foreclosing and trying to sell in today’s real estate market.

The problem of second mortgages, a large part of many lenders’ portfolios, remains unaddressed. Also not tackled is the problem of unaffordable mortgages on properties that have not drastically dropped in value. All of these loans will still go into default if the borrowers not find a job quickly or lose the job they currently have. The impact of the many commercial real estate loans about to come due is also ignored and could have a major impact on the whole economy. There are still interesting times ahead for all of us.