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Obama's new plan for underwater mortgages may be too little too late

Earlier programs helped only a few distressed homeowners

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 Updated:

Home under foreclosure in Los Angeles

Reed Saxon/AP

It was almost a blink-and-you-miss-it moment in President Barack Obama’s jobs speech, but for about 20 seconds—after he urged Congress to pass his $447 billion economic stimulus bill—he offered a quick sketch of a plan to aid struggling homeowners.

“To help responsible homeowners we are gonna work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent,” the president said Thursday evening. “I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket and give a lift to an economy still burdened by the drop in housing prices.”

For many housing activists, Obama’s declaration sounded like more of the same: a tepid response to a continuing foreclosure crisis that has put millions of homeowners at risk.

“You’ve got to be kidding me,” Mark Seifert, a Cleveland-based housing activist, told iWatch News after the speech. “This is all he said?”

The plan, which builds on an existing government refinance program, directs the president’s economic team to work with government-owned Fannie Mae and Freddie Mac, along with banks and regulators, to “help more borrowers benefit from today’s historically low interest rates,” according to a fact sheet distributed by the White House. It does not need Congressional approval.

“This has the potential to not only help these borrowers, but their communities and the American taxpayer, by keeping borrowers in their homes and reducing risk to Fannie Mae and Freddie Mac,” the fact sheet says.

Consumer advocates and lawyers representing homeowners in foreclosure say it’s difficult to judge the plan without more details, but that reducing interest rates on some mortgages won’t be enough to stem a flood of foreclosures that shows little sign of abating. They say the administration needs to require banks to reduce the debt load for struggling homeowners, especially those who are underwater—owing more on their mortgages than their homes are worth.

The president’s plan to help more of these underwater homeowners refinance at a lower interest rate builds on the existing Home Affordable Refinance Program (HARP).

That program, launched in 2009, is available for borrowers whose home is owned or guaranteed by Fannie Mae or Freddie Mac. To qualify, a homeowner must have made a year’s worth of payments no more than 30 days late, and be underwater on their home loan. But not too underwater—the outstanding amount on the mortgage cannot be greater than 125 percent of the current value of the house. In addition, borrowers must prove that they can make the new payments on a refinanced mortgage.

HARP was designed to help as many as 5 million underwater homeowners refinance into a more manageable loan. As of June 11, the program had refinanced 838,400 loans, according to the Federal Housing Finance Agency. More than 9 million Americans have received a foreclosure notice since 2008.

“Anything that is called a ‘refinancing’ program is just a joke,” Norma Hammes, a member of the legislative committee of the National Association of Consumer Bankruptcy Attorneys, told iWatch News. Such a plan would most likely help less-distressed borrowers who could probably refinance anyway on their own, she said.

“I’m sure it will help some people, but it’s not going to fix the crisis,” said Seifert, who is executive director of Empowering and Strengthening Ohio’s People, a nonprofit housing group. “Once again we’re not getting serious about what caused this and what the underlying cause is today.”

Home prices continue to slide, and more than one in five homeowners with mortgages owe more than their homes are worth, according to the data vendor CoreLogic. That equates to nearly $750 billion of “negative equity,” according to the company.

HARP isn’t the only government homeowner protection program that hasn’t lived up to expectations. Those who work most closely with struggling borrowers say they worry the effort to expand it will end up as the latest in a string of mostly unsuccessful efforts by the government to staunch the foreclosure crisis.

Since 2009, the government has pledged nearly $50 billion in Troubled Asset Relief Program (TARP) money to help struggling homeowners modify mortgages that are in default or in danger of failing.

The best-known initiative is the Home Affordable Modification Program (HAMP), which  uses money from the bank bailout fund to pay banks and loan servicers to lower homeowner payments and reduce the annual interest rate on loans to as low as 2 percent.

HAMP was intended to help 3 to 4 million financially struggling homeowners avoid foreclosure.

As of June 30, more than two years in, fewer than 700,000 borrowers had received a permanent modification on their mortgage. Of nearly $30 billion allocated for HAMP, just $1.2 billion has been spent, according to a recent report to Congress by the office of the inspector general of TARP.

In an interview with iWatch News earlier this year, shortly before he stepped down as TARP inspector general, Neil Barofsky criticized the Treasury Department, which administers TARP, for not putting more pressure on banks to modify loans.

“Treasury refuses to acknowledge that the program is not working,” Barofsky said in the interview.

One of the problems he cited was the lack of cooperation by loan servicers. Treasury officials “have no stick,” he said, and are unable to force the loan servicers to make loan modifications permanent or to crack down on abusive practices.

In its most recent report, the TARP inspector general’s office, now led by acting Inspector General Christy Romero, criticized the Treasury Department for failing to set clear goals.

Other government foreclosure relief programs have also failed to make a dent in the foreclosure crisis.

Last year, the Obama administration’s “Hardest Hit Fund” handed out $7.6 billion to 18 states which agreed to use the money to help struggling borrowers. As of March 31, 2011, 14 states had provided $11 million in assistance to just a few thousand borrowers.

A North Carolina program that uses Hardest Hit Fund money—the N.C. Foreclosure Prevention Fund—pays an unemployed worker’s mortgage for up to 24 months (up to $24,000) while they are enrolled in an educational or training program or are searching for a new job, according to a story highlighting the success of the program on a Treasury web page.

As of the end of July, North Carolina had helped 926 borrowers and distributed nearly $6 million, making it one of the most active state programs. California, with a much bigger population, had helped 856 borrowers and distributed $3.6 million.

Another government program was designed to help unemployed homeowners. Under the Home Affordable Unemployment Program (“UP”), announced in March 2010, unemployed borrowers who meet certain criteria can get forbearance for a portion of their mortgage payments for at least one year.

As of May 31, fewer than 7,000 borrowers nationwide were participating in UP.

Treasury officials did not respond to a request for comment, but the agency has recently taken more forceful action designed to push servicers to modify more troubled home loans.  

In April 2011, Treasury announced that it would start grading the 10 largest mortgage servicers participating in the Making Home Affordable program—the parent of HAMP—on “key performance metrics.” Those that didn’t make the grade wouldn’t get paid, it said.

In the first quarter 2011 assessment, Treasury determined that the servicing arms of J.P. Morgan Chase, Bank of America, and Wells Fargo Bank all required “substantial improvement.” Treasury said it will withhold incentive payments to these servicers. So far, they have collected about $232 million in modification incentive money from taxpayers.

Six other large servicers were found to require “moderate improvement.”

But Treasury didn’t clearly explain how it evaluated the servicers, nor is it taking forceful enough action to help homeowners, the TARP inspector general’s office said in its report. 

“Treasury must take strong action, including withholding and clawing back incentives, in response to unacceptable ratings to force meaningful change in the servicer’s treatment of homeowners,” the report said.

Richard Eskow, a senior fellow with the Campaign for America’s Future, a progressive think tank, said the Obama administration should take a get-tough approach with banks, requiring them to participate in loan-modification initiatives and making sure that they’re making a real effort to clean up the foreclosure mess they helped create.

“Allowing banks to self-administer a mortgage modification program is an invitation to abuse—and we’ve seen plenty of it,” Eskow said.

More information about the HARP program is available at MakingHomeAffordable.gov.