JEFFREY BROWN: A bad situation has suddenly become worse. As we heard earlier in the program, foreclosures spiked sharply upward in the first quarter of the year, this despite a number of efforts initiated by government and major lenders.
We look at what’s happening and why with John Vogel, professor of real estate at the Tuck School of Business at Dartmouth College. And we hope to be joined soon by Susan Wachter of the University of Pennsylvania. She’s also a professor of real estate and co-director of its Institute for Urban Research. We’re working on technical difficulties and hope to have her join us.
John Vogel, let’s start with why the increase. What’s going on?
JOHN VOGEL, Tuck School of Business, Dartmouth College:┬á Good evening, Jeffrey. A couple of very simple things: We have unemployment. We have the economic problems. That’s causing part of the problem. And another part of the problem is the end of the moratorium, so banks have started foreclosing again.
JEFFREY BROWN: Let’s — explain the moratorium. Remind us what that meant, who participated, and why is it coming to an end?
JOHN VOGEL: Most of the major lenders, Fannie Mae, Freddie Mac, and a number of the major banks all participated in the moratorium because the government asked them to hold off on foreclosure while they developed the Obama plan to prevent foreclosures. But it was time-limited, and now the time has run out, and these banks have gone back to foreclosing.
JEFFREY BROWN: And in terms of how the economy affects all this, there it sounds like a bit of a vicious cycle, right? Since it was the housing problem that got a lot of this going, and therefore now we have a lot of unemployment, and therefore that, what, leads to more foreclosures?
JOHN VOGEL: Exactly right. It is a vicious cycle. And I’d love to see a way to bring it to a halt. I have a few ideas about that, but we’ll discuss that during the show.
Defining a 'fair deal'
JEFFREY BROWN: All right. Well, let's get to that. First, maybe it's related, maybe you want to comment on President Obama's, the plan he put forward recently. Now, that's a $75 billion plan. And just yesterday, the Treasury Department announced that it was giving $10 billion to several of the big mortgage lenders. Tell us where things stand with that program.
JOHN VOGEL: Well, there are some brilliant parts to the Obama plan, and it's nice to see us finally putting some major resources into trying to stop foreclosure, not trying to do it all on the cheap. This is a deep problem, and we need some resources to get out of it.
My problem with the Obama plan, which is we really don't seem to have learned our lesson from the last two-and-a-half years of the housing crisis, and the lesson is that, if you make it voluntary to the lender, it doesn't work.
If you go back to October of 2007, with great fanfare, we announced Hope Now. All of the major lenders stepped up, said, "We're going to do this voluntarily," and, of course, that hasn't worked.
We, in July of 2008, announced again with great fanfare the passage of the bill with the hope for homeownership. Again, we made it voluntary to the lenders, and I guess to date we've refinanced one loan, with the $300 billion that they set aside in FHA mortgages for that program.
There are great parts to the Obama plan, some of the subsidizing down to 31 percent of income. You know, we have learned. People get foreclosed on, people can't afford mortgages that are much above 31 percent of their income.
So helping servicers, helping borrowers get to an affordable level is a great idea. Again, it's voluntary to the lender.
And, you know, if you think about that for a minute, you know, if you ask the lender, you know, "What's a fair deal?" you get one answer. If you ask the borrower, "What's a fair deal?" you get a different answer. And neither one seems to be the right answer. You need a third party to step in and say, "Here's a fair deal."
Voluntary plans aren't working
JEFFREY BROWN: All right, let me -- I think we now have Susan Wachter with us.
Am I right? Can you hear me?
SUSAN WACHTER, University of Pennsylvania: Yes, I can.
JEFFREY BROWN: All right, apologies for the...
SUSAN WACHTER: Oh, my pleasure to be here. No problem.
JEFFREY BROWN: OK, thanks for joining us. We have been talking, of course, about the rise in foreclosures and what is to be done. Now, as you look out at various programs, either the administration or private sector, what do you see that is positive? And what isn't working? What do you see?
SUSAN WACHTER: Well, right now, we're going to have a short-run surge in foreclosures as we come off the moratorium, no doubt about it. But there is much that's positive in the Obama plans, including, just started March 4th, the Fannie-Freddie plans which are making eligible millions of homes that are facing foreclosure that now are eligible for refinance at historically low rates. That will help a lot.
JEFFREY BROWN: I don't know if you heard what John Vogel was just saying...
SUSAN WACHTER: I did. I did.
JEFFREY BROWN: OK, what about this issue of making it mandatory for lenders?
SUSAN WACHTER: And that's the other piece, and I absolutely agree with John Vogel's comments. The problem is many of these plans have been voluntary, and they're dead in the water.
The other piece of the Obama plan is, if the banks are accepting TARP money, they must go ahead with the loan modification plans. And that's -- we'll have to wait to see how well that works, but it's certainly better than the voluntary plans with no incentives, and the Obama plan also has significant incentives.
More structured plans needed
JEFFREY BROWN: Have we seen to date much happening with modification of loans from the private sector?
SUSAN WACHTER: Yes, there are modifications. And let's also make sure that we understand that not all mortgages that are in default can be modified successfully. And that's the key: distinguishing between those where modifications are economically sensible and those that they're not.
The problem to date has been there have been excessive foreclosures even with mortgages that could be saved. But it takes a lot of work, a lot of effort to identify those that can be saved, and now we have incentives in place to help make that happen.
JEFFREY BROWN: Well, pick up on that, Professor Vogel. Has the thinking evolved about who should be targeted for help, how many people can be saved, or how many foreclosures are just going to have to allow to happen?
JOHN VOGEL: I think there's a problem, and it doesn't have to do with the brilliant thinking of the Obama administration and the very clever people that are there. We have to keep it simple.
Right now, you have people struggling to pay their mortgages, and you present them with a very complicated plan. The banks are trying to do it on a one-off basis, you know, make every modification on an individual, you know, "Let's modify John's loan," "Let's modify Bill's loan," kind of basis.
We have to structure it. We have to make it simple. We have to allow people to understand and qualify.
And most importantly, again, a famous Obama phrase, we have to give them hope. One of the things we've seen -- there was a very interesting report by the National Bureau of Economic Research, which essentially says, you know, there are two aspects of people struggling to hold on to their homes. One is you make it affordable, but the other is you have to bring the mortgage back down into line with what a house is worth.
And when you have 14 million homes underwater, it makes it harder for people to make that struggle, to continue to pay their loans. We're not addressing that part of the problem.
Foreclosures may still increase
JEFFREY BROWN: All right, let me ask you, finally, Susan Wachter, as we look forward here, do you expect the numbers to go up, at least in the short term?
SUSAN WACHTER: Yes, unfortunately, I do expect them to go up in the short term, and then hopefully, as the economy improves -- and a lot depends on that -- we'll see some leveling off in 2010.
JEFFREY BROWN: All right, well, again, apologies for the technical troubles.
SUSAN WACHTER: My pleasure to be here.
JEFFREY BROWN: Thank you, Susan Wachter and John Vogel.
JOHN VOGEL: Thank you.