TOPICS > Economy

Public, Bankers, Analysts Debate Merits of Obama’s Foreclosure Plan

February 19, 2009 at 6:35 PM EDT
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Reaction in the banking world and among the public to President Barack Obama's plan to ease home foreclosures has proven mixed. Analysts debate the plan's merits and examine what the measure may mean for homeowners and lenders.

JIM LEHRER: And to the global economy, take three, reaction in the U.S. to the president’s home foreclosures plan. Judy Woodruff is in charge.

JUDY WOODRUFF: Two of the nation’s largest banks, Wells Fargo and Bank of America, gave a partial thumbs-up to the housing rescue plan, announcing today that they would continue to hold off on any foreclosures into next month, when the plan is enacted.

U.S. PRESIDENT BARACK OBAMA: The home mortgage crisis, the financial crisis, and this broader economic crisis are all interconnected. We can’t successfully address any one of them without addressing them all.

JUDY WOODRUFF: The president’s plan, announced yesterday, is a sort of shock therapy for the deepening recession, aimed directly at the housing crisis. Almost 1 in 10 homeowners were late on mortgage payments last year. In the last three years, 3 million people lost their homes. And the administration said as many as 6 million homes could go into foreclosure unless immediate action was taken.

All the while, home prices keep plummeting.

BARACK OBAMA: The plan I’m announcing focuses on rescuing families who’ve played by the rules and acted responsibly, by refinancing loans for millions of families in traditional mortgages who are underwater or close to it.

JUDY WOODRUFF: The key measures of the plan include $75 billion to keep 3 million to 4 million at-risk homeowners out of foreclosure. This would include cash incentives to lenders if they lower payments.

The lender would agree to set payments at no more than 38 percent of a borrower’s income. The government would then share the cost and lower the payments further, to 31 percent of income.

Banking chiefs, like Jamie Dimon of JPMorgan Chase, reacted positively.

JAMIE DIMON, CEO, JPMorgan Chase: I think the plan is really elegantly done and really well designed. We think it will be a very successful program.

JUDY WOODRUFF: The plan also helps the 4 million to 5 million homeowners with little equity in their homes refinance to cheaper mortgages. But many of the estimated 14 million other people who are in worse shape, underwater, meaning they owe more than their home is worth, are left out of this plan.

Russell Stearns of Washington state was underwater and drowning. He took a $300,000 loss, selling his home to avoid foreclosure.

RUSSELL STEARNS: It is a big mess. I don’t see — I don’t see a solution for it. I definitely don’t see how throwing money at the problem is going to help.

JUDY WOODRUFF: Regardless, more money is coming. Fannie Mae and Freddie Mac will get an additional $200 billion, doubling the government’s commitment to them to increase credit availability. That’s got some in Congress upset, asking why Fannie and Freddie should be getting more taxpayer money.

And some of Mr. Obama’s plan will require congressional approval. He’s seeking legislation that will allow bankruptcy judges to modify mortgages for owners in trouble.

Many bankers say this housing rescue is incomplete and not broad enough, but FDIC Chairwoman Sheila Bair said the plan will have a big impact and soon.

SHEILA BAIR, chairwoman, Federal Deposit Insurance Corporation: There will still be some borrowers who lose their homes to foreclosures. Some of that will be inevitable. But this should have a significant reduction in the foreclosure rate, bringing it more in line to historical levels, and decreasing unnecessary foreclosures, which are putting artificial downward pressure on home prices, which is hurting everybody.

Reactions to the housing plan

John Courson
Mortgage Bankers Association
Well, I think that's a solid piece. I mean, obviously, what we want to do is prevent foreclosures and we want to help people stay in their homes, particularly those that are able to make their payments but are, as we say, underwater.

JUDY WOODRUFF: Meanwhile, 10,000 Americans slip closer to foreclosure every day.

For more, we get two perspectives now. John Courson is the president and CEO of the Mortgage Bankers Association. And Ellen Harnick is senior policy counsel for the Center for Responsible Lending, a consumer advocacy group.

Thank you both for being with us.

Ellen [Harnick], I'm going to turn to you first. Overall, in brief, what do you think of this plan?

ELLEN HARNICK, Center for Responsible Lending: I think, overall, it's a very good plan. It's smart, it's practical, and it addresses some of the problems that we've been hearing bankers and services express as reasons why they haven't been able to turn these loans that are failing into loans that would be sustainable.

JUDY WOODRUFF: John Courson, speaking for the mortgage bankers, what do you think of this plan, in brief?

JOHN COURSON, Mortgage Bankers Association: Well, we do, Judy, commend the administration for the plan and its efforts to refinance and modify loans. Actually, I think it's a solid step to returning stability to home prices and allowing our citizens to stay in their homes. So we think it's a solid plan.

JUDY WOODRUFF: Well, Mr. Courson, let me stay with you. Let's break this down, first, the refinancing piece of this. The administration is saying it's going to help an estimated 4 million to 5 million what they call responsible homeowners who are current on their mortgages, but who would benefit from refinancing at a lower rate. What does the mortgage industry think of that particular piece of it?

JOHN COURSON: Well, I think that's a solid piece. I mean, obviously, what we want to do is prevent foreclosures and we want to help people stay in their homes, particularly those that are able to make their payments but are, as we say, underwater.

I would add, however, that this plan, of course, will only help those who would be able to borrow 5 percent over what their current appraised value is. And, really, since Fannie Mae and Freddie Mac already have that risk on their books, we think there may be an opportunity to expand this plan really far beyond the 5 percent cap.

Since they have the risk, they could really reduce the interest rates as they are in the present plan. And there's a precedent for this under the Federal Housing Administration. They have what's called a streamlined refinance, where they are willing, since they already have the risk of the insurance, to go ahead and offer lower payments to a much wider band of borrowers than those who'd be covered by the present restriction of 5 percent over the appraised value.

JUDY WOODRUFF: But even without that expansion, do you think this part of the plan will work?

JOHN COURSON: Oh, sure, it will work. I mean, it has been proven to work under other programs, too. And what we're trying to do, obviously, and we applaud, is get borrowers into current interest rate loans where, in fact, the fact that they're underwater, that they are incented to keep those houses, able to make those payments, and stabilize values in their neighborhoods.

Homeowners under immediate risk

Ellen Harnick
Center for Responsible Lending
The crisis started, actually, with these very tricky mortgages that had confusing terms and some of their costs were obscured. And as those mortgages started to fail, we saw foreclosures rise.

JUDY WOODRUFF: What about, Ellen Harnick -- to you first -- or second, I should say, on this piece of it, the so-called refinancing piece? What's your take on it? And do you agree with Mr. Courson that it really should be expanded?

ELLEN HARNICK: Well, I think it's a very good piece. I think it addresses a problem that we're seeing in the way that the crisis has changed.

The crisis started, actually, with these very tricky mortgages that had confusing terms and some of their costs were obscured. And as those mortgages started to fail, we saw foreclosures rise.

What we've seen now is that the housing market has been so impaired and the credit market so impaired, as well, that borrowers who got loans that were not tricky, 30-year fixed-rate loans that were held by Fannie Mae and Freddie Mac, they're now at risk of foreclosure for reasons having to do with the general economic crisis.

And so I think this part of the program is aimed at helping those people to avoid foreclosure so that the foreclosure problem does not deepen. So I think that is an excellent part of the plan. I think what's also key is the part I suppose we'll come to next, which is dealing with the people who are immediately at risk of foreclosure.

JUDY WOODRUFF: And I do want to bring us now to that piece. This is a group, the administration is saying roughly 3 million to 4 million people, who are seriously at risk, where the loan balance they have is well over the value of the house.

Now, this, Mr. Courson, creates cash incentives for the lenders to modify down the terms of the loan. What does the mortgage industry think of this? Is this something that's going to work?

JOHN COURSON: I think it will work. I think it's very helpful, as a matter of fact. It really aligns the interest of lenders and the interest of borrowers. There's also incentives, obviously, for borrowers who need modifications to take advantage of this plan.

And when you look at the 31 percent debt-to-income ratio and bringing those people back in to where they, in fact, can afford to make those payments, again, is an excellent alignment of the interest.

The industry has worked diligently to modify loans. It's not like this is going to be the first time or the first incentive they've had. But, clearly, the incentive is there.

And, in addition, they have an incentive, as does the borrower, to make sure that the modification works. There are incentives for the borrowers to continue to make their payments once their loan is modified.

JUDY WOODRUFF: But help us understand why, if these modifications are -- improving the terms is already happening, why are these incentives necessary?

JOHN COURSON: Well, this incentive is necessary because what you're doing now is you're getting additional loans and a sharing. I mean, there is a sharing here of the government pushing loan-to-value ratios -- debt-to-income ratios down to 31 percent and a sharing.

And that's a low level. That's the level, in fact, that was going to truly be very important to assisting these borrowers to have affordable payments over the next five years.

Incentives for banks

Ellen Harnick
Center for Responsible Lending
Under the current arrangement, if the servicer tries to modify the loan -- which is a lot less expensive than foreclosing, but has a cost -- currently the servicer is not reimbursed for this.

JUDY WOODRUFF: Ellen Harnick, what about this, the fact that the banks are being offered incentives to give people more favorable terms?

ELLEN HARNICK: I think it's important to make -- to note the role of these companies that are called servicers. Servicers step into play when a loan has been sold to investors.

And in that case, a loan is held by hundreds of investors around the world, and so the borrower is not dealing with a lender when they run into trouble. They're dealing with this company called the servicer that has to manage the loan.

And the problem that the servicers have been having is that they have mixed incentives when it comes to modifying these loans. So, for example, if a servicer allows a loan to go into foreclosure, the servicer gets reimbursed for all its costs of foreclosing, which are substantial.

Under the current arrangement, if the servicer tries to modify the loan -- which is a lot less expensive than foreclosing, but has a cost -- currently the servicer is not reimbursed for this. And so...

JUDY WOODRUFF: So there's a disincentive now?

ELLEN HARNICK: There's a disincentive.

JUDY WOODRUFF: So does this undo that?

ELLEN HARNICK: Well, it does, because...

JUDY WOODRUFF: Effectively?

ELLEN HARNICK: ... the plan would provide a payment to servicers for each loan that they modify. That's one piece.

A second piece is, most of them -- in most cases, loans are falling into foreclosure at a much higher rate than the modifications. Credit Suisse had a study that showed 3 percent of 90-day delinquent loans got a modification. And many of those modifications didn't lower the monthly payments, but increased them.

And so a key piece of this plan is, it will set a guideline about what kind of modification will qualify. And it's going to be important to lower the payments so that the loan is sustainable.

JUDY WOODRUFF: And do you think that will be done?

ELLEN HARNICK: Well, I think it will be -- I think there's a very good likelihood that it will be done. I mean, we will be watching to see if -- if the servicers do take up these incentives.

But I think we have -- the Mortgage Bankers Association, we have John Courson saying he thinks it's a good plan. I think that that's a good indication of where we hope the servicing industry will be.

Extending help even further

John Courson
Mortgage Bankers Association
I mean, it's clear you have to draw a line. I mean, there is only so much that, obviously, we can do and we can help.

JUDY WOODRUFF: Mr. Courson, what about the millions of other homeowners who are also underwater, but are just not as bad off as this second group that we've described? How do you -- I mean, do you defend the dividing line that was drawn here by the administration?

JOHN COURSON: Well, you have to -- I mean, it's clear you have to draw a line. I mean, there is only so much that, obviously, we can do and we can help. This line is very broad.

As I've said before, however, I think that the line can be expanded. I think we can expand the line and those who are available for the refinance piece. And, frankly, as Ellen said on this piece, the modification piece, there is still a segment of borrowers whose loans are in securities that are private label securities that will still have trouble being -- taking advantage of this modification, because the servicers are dealing under contractual arrangements with the investors and are limited to what they can do for those borrowers.

And so one of the things that we have talked about as an association and our members is some sort of a safe harbor so that our servicers can get to those borrowers inside those securities and modify them without the fear of litigation.

That's a very important piece. And we need to work aggressively to achieve that goal to include even more. So I think it could be more expansive on both sides.

JUDY WOODRUFF: OK. So just to translate that in layperson's terms, Ellen, are you saying -- is that something that your organization would go along with?

ELLEN HARNICK: I'm very -- we're very sympathetic to that view. So just to spell it out, these servicers are in a bind, because they represent a bunch of investors who have different interests.

And so you'll have a situation where everyone agrees that foreclosing will yield much less than a sustainable modification, but some investors will do better if you structure modification one way and other investors would prefer it another way. And so it's important to create some sort of way of giving servicers comfort that they won't be sued.

JUDY WOODRUFF: So it sounds like there are still some pieces of this that have to be worked out, and we're going to be looking for more details. The administration will be rolling out more information, I guess, two weeks from now.

All right, I want to thank you both, Ellen Harnick and John Courson. Thank you very much.

JOHN COURSON: Thank you, Judy.