JIM LEHRER: Finally tonight, a follow-up report on the home foreclosure crunch and why relief isn’t coming more quickly.
Ray Suarez has the story.
REP. BARNEY FRANK, Financial Services Committee chairman: This is a fundamental problem that we have got.
RAY SUAREZ: With more than three million homeowners facing foreclosures this year, executives from leading banks were called before the House Financial Services Committee today. The bankers insisted they’re working to help more people, but they worried aloud about the Obama administration’s push to have banks reduce the principal on some mortgages, to bring them in line with what the houses are now worth.
DAVID LOWMAN, CEO, J.P. Morgan Chase Home Lending: Our first concern is that such programs could be harmful to consumers, investors, and future mortgage market conditions, and shouldn’t be undertaken without first attempting other solutions, including more targeted modification efforts.
MIKE HEID, co-president, Wells Fargo Home Mortgage: Principal forgiveness needs to be used in a very careful and focused manner. Through experience, we have found that it’s best used to assist customers in areas with severe price declines, where there’s little prospect for full recovery of home values.
RAY SUAREZ: Bank officials told the committee they were worried cuts in principal could cost them hundreds of billions of dollars. Execs from four leading banks testified, including Bank of America. For the record, Bank of America is a “NewsHour” underwriter.
Democrat Paul Kanjorski of Pennsylvania warned, there’s growing frustration that banks aren’t doing enough.
REP. PAUL KANJORSKI D-Pa.: It doesn’t seem that the numbers are very high with what’s being done as of this present time. There are a hell of a lot more potential foreclosures out there that may be caused or may come about because we quite haven’t arranged things.
RAY SUAREZ: Some of the places where foreclosures are highest are markets that once soared, including Cape Coral in Southern Florida.
Last night, economics correspondent Paul Solman showed the impact there. He visited Jason Welsh, a golf pro who bought this house a decade ago for roughly $100,000. He renovated it, added a pool, hiking his mortgage to $240,000.
JASON WELSH, golf professional: This was quite an undertaking. We had to put in a retaining wall.
RAY SUAREZ: Today, given the decline in prices in that neighborhood, the house would sell for possibly $100,000. Welsh hasn’t made a payment in six months, while he’s asked the bank servicing the loan to lower it. He made the banks an offer of $150,000, saying he would re-buy the house for more than it’s worth. But the bank refused, and Welsh faces foreclosure or a short sale. The bank plans to sell the house for far less than what Welsh is offering.
JASON WELSH: I call. I try and get help. They just say I don’t qualify. And they’re willing to sell it to somebody else for $100,000 out from underneath me.
It’s just upsetting that there’s supposed to be help out there, and there is none.
RAY SUAREZ: Bill Valenti is a banker in Fort Myers. His bank wasn’t involved with Welsh’s case. He said some borrowers are more deserving of help than others.
BILL VALENTI, president & CEO, Florida Gulf Bank: I have sympathy for people who walk away because they have lost their job, they have had a medical catastrophe. I have no sympathy for somebody who simply elects to walk away because the value of their home is now less than their mortgage.
RAY SUAREZ: So far, only 170,000 homeowners have received a permanent modification through a combination of government and bank programs.
For more on the question of homeowner relief, we get two views about why it’s not happening faster. Bert Ely is a banking industry consultant who runs his own firm in Northern Virginia. And Julia Gordon is senior policy counsel at the consumer advocacy group the Center for Responsible Lending.
And, Julia Gordon, let’s start with you.
Why was it so hard for people whose homes are underwater to get the banks to agree to a lower principal balance?
JULIA GORDON, senior policy counsel, Center for Responsible Lending: It’s hard because it’s hard for them to get any modification at all, to begin with. Whether you’re underwater or not, dealing with mortgage services is exceedingly difficult, and many borrowers are struggling with that.
But it’s particularly difficult because the primary government program targeting this issue right now, the Home Affordable Modification Program, does not right now include a principal reduction component.
The mortgage services are only doing what they’re essentially required to do. They’re not really going above and beyond, particularly in a situation where not only does this cost the owner of the loan money in many cases, but, in — in most cases, it costs the servicers some of their own fees.
RAY SUAREZ: Bert Ely, this housing crisis has been going on for some time. And one of the most consistent complaints is from homeowners who are trying to get some relief and haven’t been able to.
BERT ELY, banking consultant: Well, I think there are two sides to this story. Julia talked about the problem from the servicers’ side.
But, also, servicers are having a lot of problems in many cases working with homeowners. They have a hard time getting them on the phone, being able to work with them, or to get the necessary documentation that is needed for a modification.
The other thing that is important to keep in mind is that many homeowners have debt problems beyond just their mortgage. They may have a credit card loan, a car loan, a second mortgage on the property. And, in my opinion, it is not possible to do a mortgage modification in isolation.
You have to look at the homeowner’s total situation, which, oftentimes, can be complicated if there has been a job loss. For instance, you could have two wage-earners in the family. One of them lose a home — loses their job, that loss of income can make the difference between being able to service their debts and not.
RAY SUAREZ: Well, last night, on the NewsHour, we saw the story of an employed individual who was looking on as the bank was getting prepared to take less money than he was willing to pay for the house, and move it toward foreclosure. Why does that happen?
BERT ELY: Well, we don’t know what all the specifics are of that story, so I’m reluctant…
RAY SUAREZ: But it’s not a unique case.
BERT ELY: No, it’s not a unique case.
But we do have a number of situations where people are under — what is so-called underwater on their loan, where they owe more. But I think there are many folks that have some real concerns about these principal reductions, which effectively is what this would be, that it’s unfair to those folks who, in fact, have made their mortgage payments.
For whatever reason, they have been able to stay current. They’re — they may be underwater, but they’re current on their mortgage, are not facing this situation. And there’s a political angle to this, too, that, if the government goes quite far in terms of trying to help people through principal reduction, that that will create a political backlash among those homeowners who, for whatever reason — and maybe it’s luck as much as anything else — have been able to stay current on their mortgage and are sticking with their house.
RAY SUAREZ: Julia Gordon, do you agree with what Bert Ely just said?
JULIA GORDON: You know, he — he’s right. There is a political aspect to this. And there are fairness complaints.
But what’s important to remember is that we are facing a public policy crisis right now. We have already had well over two million people lose their homes in a foreclosure sale. We have another four million or so in the pipeline somewhere in the foreclosure process just waiting for the other shoe to drop.
And some estimates have said there could be another four or five million or more after that still — still waiting to foreclose. So, it’s incumbent upon the government to — to get ahead of this crisis. You know, we have just been through a very difficult economic recession. And, if we don’t fix the housing market, you know, we could see a return to those conditions.
RAY SUAREZ: So, how do you explain the not-unique situation that we saw last night where banks are on the road toward ending up owning a house that they will sell for considerably less than the homeowner, currently occupant, is willing to pay?
JULIA GORDON: There is nothing about common sense that can explain it.
The only things that explain it are the extremely complex structure of the whole mortgage market, how mortgages are made and sold and turned into securities on Wall Street, and then how these accounts are serviced by other companies that, in many cases, are owned by other banks.
It’s very complicated. There are a lot of cross-cutting incentives and a lot of stuff going on behind the scenes that you can’t really see.
RAY SUAREZ: Bert Ely, since the housing crisis began, banks have announced, with — sometimes with great fanfare, programs to help out troubled homeowners, yet a very small number, as we heard in our report, have been helped in that way over the three years. What’s going on?
BERT ELY: Well, I think part of it is that the nature of the problem has changed. A couple — a year or two ago, a lot of the problem revolved around subprime mortgages, so-called liar loans, and so forth.
But, as the recession has deepened, as the jobless rate has gone up, a lot of mortgages that were prime mortgages at the time they were made are now in default because of a loss of income in the — in the family and the accumulation of other debts.
And people are just not able to — to maintain their mortgage payment. And this gets to what I think is another aspect of this problem. And — and that is, is the government actually solving problems through the approaches it’s taking, or are we just simply rolling a problem forward and prolonging the housing crisis?
Quite frankly, there are a number of situations where it’s in everybody’s interest for the homeowner to give up the ownership of the house, to become a renter again, so that the housing market can find its bottom and start to come back. We saw this in Texas in the 1980s, and we’re going to go through that same process again.
RAY SUAREZ: How about that, Julia Gordon, just let the market work?
JULIA GORDON: If only the market worked. If the market worked, we wouldn’t be where we are now.
You know, a lot of people like to talk about the housing market finding its bottom. There’s not some objective bottom out there that we just need to reach. What happens in communities is, foreclosures beget more foreclosures. You have a foreclosure, the value of the neighboring homes — even if those people are in their homes paying their mortgages, the value of their homes drops steeply.
The tax basis of the community is eroded. That impacts schools and municipal services. There’s an increased demand on police and fire services. You know, there’s increased crime from vacant homes.
And that causes a downward spiral that some people have called a death spiral in the neighborhood that is entirely unnecessary. And the reason the government is, fortunately, now getting involved, though, for some years, they — they kind of sat on their hands, is to try to save these neighborhoods.
You know, some — some people have called this a 50-state Katrina, where whole neighborhoods are just being destroyed. And, in many cases, it’s lower- and middle-income neighborhoods, neighborhoods that were stable neighborhoods, neighborhoods where you had grandparents rocking on the porch. And the entire infrastructure of that neighborhood is just going down the drain.
RAY SUAREZ: Julia Gordon, Bert Ely, thank you both.
BERT ELY: Glad to be here.
JULIA GORDON: Thank you.