Obama's housing fix: Encourage lenders to help borrowers

McClatchy NewspapersFebruary 17, 2009 

WASHINGTON — President Barack Obama on Wednesday took a carrot-and-stick approach with banks and other lenders as he unveiled his new plan to stop the soaring nationwide home-foreclosure rate.

He's announced in Phoenix a plan to use $75 billion in Wall Street rescue money authorized last year to provide subsidies when banks reduce interest rates for troubled homeowners to lower the monthly payments many Americans are now struggling to pay.

That subsidy plan, will serve as the carrot for banks to help homeowners stay in their homes and halt foreclosures, which not only result in losses for individuals and the banks, but also drag down the values of nearby homes.

Banks have joined two prior voluntary efforts during the Bush administration — Hope for Homeowners and the Federal Housing Administration's FHA Secure — but these efforts have resulted in relatively few mortgage modifications.

Now they'll have a stick waved at them if they don't comply with the subsidy plan. It'll come in the form of Obama's support for legislation pending in Congress that would allow bankruptcy court judges to modify the terms of a mortgage.

That's forbidden right now, and banks and other lending institutions fiercely oppose what they call "cram down" legislation, warning that it'll bring uncertainty for lenders, who'll respond by restricting mortgage lending.

Banks will soon have to choose between the lesser of two evils. They could either modify loans — with a subsidy — to provide lower lending rates, and lose what they might've made from the higher lending rate over the life of the loan. Or they can do nothing and run the risk that a homeowner could file for bankruptcy and then have a judge order new loan terms that allow the borrower to stay in the home — and pay the lender less money.

The president's plan also is expected to offer payments to mortgage servicers, who collect mortgage payments on behalf of investors who own the mortgages originally issued by banks but were sold into a secondary market. Servicers apparently would be offered a payment for modification on par with what they'd collect in the case of foreclosure.

"Ten thousand people face foreclosure every day in this country. And it's a problem that not only affects the individual homeowner and their family, but oftentimes has a direct impact to home values in the neighborhood that that house or homes are on," White House spokesman Robert Gibbs told said on Tuesday. "This is a tremendously important part of what the president believes has to be done next in order to move our economy forward."

More than 2.3 million mortgages entered foreclosure proceedings last year, and by year's end almost one in 10 mortgages in the U.S. were either delinquent or in foreclosure. Some prominent economists such as Harvard University's Martin Feldstein think that one in five homes nationwide is worth less than the mortgage that was arranged to purchase it.

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