JEFFREY BROWN: Ever since Congress passed its financial rescue package last month, fears have grown that the twin problems of decreasing home prices and increasing foreclosures had not been adequately addressed.
Amid growing calls to help distressed homeowners, more direct responses now appear to be in the works.
According to recent data, foreclosure filings in the third quarter were up 71 percent from a year ago, with some regions hit particularly hard. And the average price of a home dropped by 9 percent in the last year. Again, some areas saw much greater drops.
In recent weeks, candidates, lawmakers, and academics have put forward a variety of proposals to address the problem. And now the Bush administration appears ready to make its next move.
On Thursday, officials appearing at a Senate hearing said they’re working on details of a plan in which the government would provide a partial guarantee on troubled home loans. Sheila Bair is the head of the Federal Deposit Insurance Corporation.
SHEILA BAIR, Chairman, Federal Deposit Insurance Corporation: The FDIC is working closely and creatively with Treasury on ways to use the recent financial rescue law to create a clear framework and economic incentives for systematically modifying loans. The aim is for loan servicers to offer homeowners more affordable and sustainable mortgages.
JEFFREY BROWN: The new plan, which could be announced in the next week or two, is estimated to cost some $40 billion.
And now a look at several ideas on the table. Bruce Marks is the chief executive of the Neighborhood Assistance Corporation of America, a not-for-profit advocacy group for homeowners.
Dan Alpert is founder and managing director of Westwood Capital, a small investment bank.
And Neil Irwin is a financial reporter who’s been covering the housing and banking crisis for the Washington Post.
Bruce Marks, let’s first define the problem. Beyond the numbers, what’s happening out there? What do you see?
BRUCE MARKS, Neighborhood Assistance Corporation of America: Sure, I mean, what is out there, Jeff, is that it’s the foreclosures, stupid. That’s what we have to say to Congress and we have to say to the administration, because all the solutions out there, the refinances, all those solutions are not working, and that there are millions of homeowners at risk of foreclosure because they can’t afford their mortgage payments.
So what we have to do is we have to restructure these mortgages to make them affordable. That’s not being done, not being done by the servicers or by the investors. All the solutions out there are failing, Jeff.
JEFFREY BROWN: So in simple terms, explain what you think should be done. What are the general principles for any plan?
BRUCE MARKS: Right, well, the real general principles is to go back to what lending used to be. It’s saying, “Let’s determine what a homeowner can afford.”
So what we say is, what is someone’s income, their required monthly liabilities, their card expenses? And then you come up with a mortgage payment and you say, “This is what I can afford.” And that’s how you do it.
Now you have to restructure the mortgage. Let’s not do a new loan, a refinance. Stay with the existing lender, servicer, investor, and say, “Reduce the interest rate to get to a mortgage payment that the homeowner can afford.”
It’s basic lending. It’s going back to the fundamentals. This is what the homeowner can afford. Restructure the mortgage. And that’s good, Jeff, for everybody.
It’s good for the homeowners. That’s good for the servicers who are overwhelmed. Good for the investors. Good for the communities. And you can do that without one dollar of taxpayer money.
Prices dwarfed actual value
JEFFREY BROWN: Now, Dan Alpert, before I ask you about what you'd propose, I'd just note, you know, in our news summary today, we said that home sales were actually up a bit in September, still down a lot from last year, but up surprisingly.
Does that suggest at all to you that the market may have, I don't know, settled, figured this out a bit?
DAN ALPERT, Westwood Capital: Well, I'm looking more at home prices. And if you look at home prices, they continue to decline.
The issue that really faces us is that so much of the value increment that was created during this lax lending and low-interest-rate period throughout the decade really never truly existed.
The cost of housing completely disconnected from alternatives of rental. They completely disconnected from personal income. And we ended up at a point where we believe housing values are going to nationally plummet by about 30 percent peak to trough.
That generates many, many losses. We went from $5.4 trillion in outstanding mortgage debt in 2000 to $11 trillion at the end of 2006. That more than doubled the amount of housing debt outstanding.
Theoretically, we had some $20 trillion worth of housing stock. But, unfortunately, a 30 percent drop from that takes you down to $14 trillion. And here's the zinger: About a third of all homes have no mortgages on them at all.
So you have less than $11 trillion worth of collateral supporting $11 trillion worth of loans. That's going to create mortgage losses. It's obviously creating a huge negative wealth effect amongst people who own housing. And that, of course, is translating into a mammoth recession.
JEFFREY BROWN: Neil Irwin, let me bring you in. You've been covering this in Washington. Why was there reluctance early on in the administration to tackle this problem head on?
NEIL IRWIN, The Washington Post: Well, the simple fact is it's great to talk about finding ways to prevent foreclosures to help people afford their mortgages, but it's really hard to do that in a way that doesn't, you know, disrupt private contracts that is actually practical.
You know, the reality is there are these existing mortgages. People signed up for them voluntarily. The banks entered deals with both the mortgagee and with whoever ultimately owns that mortgage.
And, you know, anything you do to try to help people afford a mortgage or renegotiate, you kind of need buy-in by all those parties, unless you're, you know, running the risk of a lawsuit.
So the basic situation is, it's a lot -- it's a great thing to talk about. It's a much harder thing to execute in practice.
JEFFREY BROWN: And we mentioned this potential new plan by Treasury and the FDIC that Sheila Bair has been touting. Details to come, clearly, on this, but what do we know so far?
NEIL IRWIN: The rough outlines are that a mortgage company, a lender, a bank would agree to lower the value of a mortgage or what's owed on it to what a person can actually afford in exchange for the government being willing to protect the bank or the lender against any future losses.
So the idea is the government steps in and says, "All right, if you renegotiate this mortgage so it's, say, the person only has to pay 32 percent of their income, something that's affordable, we'll bolster it and protect you against further losses."
Again, the level of detail you have to get into to actually make something like that work is truly daunting.
JEFFREY BROWN: Bruce Marks, what about something like that?
BRUCE MARKS: Well, you know, it's not that complicated. I mean, I think, you know, people make it far more complicated than what it is.
What we know doesn't work is we know that refinancing, getting a new loan, doesn't work because the value is not there. People's credit scores are not there. That doesn't work.
So what we have to focus on is with the existing servicer and the investor. And it's very simple. You determine what the homeowner can afford and you reduce the interest rate. At NACA, we're able to do this for tens of thousands of homeowners with the major servicers.
Working with market, not against
JEFFREY BROWN: But who -- but let me interrupt -- let me interrupt you. Who takes the hit in that point? Is it the lender, the servicer, or the government? Who's taking the hit?
BRUCE MARKS: Well, it is the investor that won't get their 9 percent or 10 percent interest rate, that might get their 4 percent or 3 percent interest rate, but they won't incur the foreclosure cost, because what you're focusing on is not what the value of the property is. You're focusing on what the mortgage payment is.
And you're locking that in for the remaining term of the loan. So you have a fully amortized loan so it doesn't -- so even if the loan is underwater, even if you owe more than what it's worth, then, as long as you have a full amortizing loan with every payment, you're paying off a bit of the principal, with no taxpayer dollars.
But you know what the biggest problem is, Jeff? And that is Fannie Mae. Fannie Mae, which sets the standard for this country, is the investor. So, in essence, because they're refusing to do this, that's what's causing the massive numbers of foreclosures in this country. We change Fannie Mae's policy, we change it for the industry.
JEFFREY BROWN: All right, Daniel Alpert, you can respond to that. I want to let you -- you have a whole other idea for how to do this.
DAN ALPERT: Well, first of all, I'm more with Neil. And, unfortunately, we have the sanctity of contracts in this country. And it's very, very difficult. We've seen already how difficult it is to jawbone lenders, which is what the Hope programs were trying to do, into making these alterations to their mortgages.
Think about the private securitizations, which account for trillions of outstanding mortgages. And those folks are, you know, servicers and trustees that are beholden to bondholders who own little pieces of these mortgages.
They're not going to risk their entire credibility and they're entire balance sheet by somehow voluntarily making changes to these mortgages that are going to impair the folks that own them.
So unless something happens that's of a more mandatory nature, I'm afraid we're going to have a big problem. That's what our plan calls for.
We have come up with a plan basically to allow mortgagees, mortgage -- sorry, borrowers who are underwater or who have very high loan-to-value loans who can't make the payments to effectively do what they're supposed to do under their mortgage, which is surrender their collateral, surrender their deed.
Right now, the cost of collection of mortgages is running something like 30 percent of mortgage balances when it goes through foreclosure. In good times, it was 19 percent. So you're talking about a huge additional cost. If deeds are surrendered voluntarily, you save that cost.
Now, who would do that in their right mind? No one. So what we're proposing is that lenders be required on a mandatory basis to lease the properties back to the homeowners for a period of time. We've suggested four to six years, during which time homeowners will have a chance to get their financial houses in order and be able to buy back the home -- theoretically at a price lower than they paid for it originally -- at fair market value in four to five years.
Look, if you believe that this crisis is created by some sort of a cyclical downturn, this was a bubble. This was not an oversupply of housing or anything like that. It was a pure bubble.
Housing prices are going to recalibrate down to where they match off against rents, where they match off against personal incomes.
New practices, not cash will help
JEFFREY BROWN: All right, let me bring Neil Irwin back in here, because this discussion -- I assume this kind of discussion is going on in Washington about how to -- you know, early on, there were concerns about what's called moral hazard and sending the wrong incentives to people, how to limit any kind of program. What kind of discussion or worries do you get on the Hill and in Treasury right now?
NEIL IRWIN: Well, think about it this way. If you create a program where you say, "If you can't afford your mortgage or it's hard to afford your mortgage, you can renegotiate it with some government help," that can almost create incentives.
People who are kind of scratching by, and really stretching, and maybe working a second job to try and keep up with their mortgage payments, they might have an incentive then to just default, to just stop paying their mortgage, and then they could be subject and benefit from some kind of government program along these lines.
You know, there's a lot of perverse incentives that can come along, and that's what a lot of Republicans especially are worried about.
You know, the truth is, the FDIC, under Sheila Bair, they took over -- they're kind of doing an experiment on this right now. They ended up taking over the failed bank IndyMac back in August, and they said, you know, we're going to move aggressively to try and renegotiate mortgages to help people out.
They had 60,000 people either in some stage of the foreclosure process, 60,000 mortgages. As of last week, only 3,500 of those had successfully been renegotiated. We're talking about massive, massive numbers of mortgages, and dealing with individual homeowners, thousands of people all over the country. It's a very big challenge.
JEFFREY BROWN: All right, Bruce Marks, I know you wanted to jump back in. Go ahead.
BRUCE MARKS: Yes, please. Look, let's talk about the reality of what's going on, on the ground. There are solutions that are working now.
When you talk about -- you've got Secretary Paulson. He controls Fannie and Freddie. They have 50 percent of all the mortgages in this country.
Now, Fannie says that you have to be four months late before they will restructure the mortgage. Fannie says that they will not reduce the interest rate less than the market value, less than the market rate. They will never reduce their principal.
They're the biggest problem. So, in essence, the American taxpayer, who owns Fannie Mae, is foreclosing on themselves. And so if we want to do a dramatic solution, something that's going to help virtually the whole industry, every homeowner at risk of foreclosure, we change the practices of Fannie Mae, because it's not just for the 30 percent of the mortgages that they own or that they guarantee or Freddie, the 20 percent that they own or guarantee, but whatever they do become the accepted solution for the industry.
And then let's take the Sheila Bair standard. When Sheila Bair took over IndyMac, what did she do? First thing, a moratorium on foreclosures. Second thing, stop the interest rate increases. Third thing, restructure the mortgages based on what the homeowner can afford.
Well, if Sheila Bair can do that as head of the FDIC and she owns IndyMac, and if NACA can do it as a nonprofit mortgage broker, why can't we have Secretary Paulson, who owns Fannie and Freddie, and they can set the industry standard?
We don't have to go through the gymnastics of giving the deed back and re-renting it, or refinances, or using the taxpayer money. We can do it the right way, with the solutions that are already there staring in our face.
JEFFREY BROWN: All right. I think we're going to have to leave it there, but we'll come back to this no doubt in the coming days or weeks as the plan develops. Bruce Marks, Daniel Alpert, and Neil Irwin, thanks all very much.