TOPICS > Economy

Help for Burdened Mortgage Borrowers Offers Costs and Benefits

November 11, 2008 at 6:10 PM EST
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U.S. homeowners have been among the hardest-hit by the global economic meltdown. In the first of a series, analysts discuss the benefits and flaws of governmental and lender recovery plans, including Citibank's offer to modify loan terms for those falling behind.
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JUDY WOODRUFF: Our economic coverage starts with a two-part look at rescue plans for the housing and financial crises.

First, housing. Jeffrey Brown has the latest on new efforts by the government and lenders to help distressed homeowners.

JEFFREY BROWN: The plan announced today would set guidelines for modifying the delinquent mortgages of hundred of thousands of borrowers seeking to avoid foreclosure.

More than four million homeowners are at least one payment behind, and 500,000 are in foreclosure, according to recent data.

Fannie Mae and Freddie Mac own or guarantee nearly 60 percent of the nation’s outstanding mortgages. The two companies have been held in conservatorship by the federal government since mid-September.

The director of the Federal Housing Finance Agency, James Lockhart, outlined the criteria for streamlining loans.

JAMES LOCKHART, Federal Housing Finance Agency: The program targets the highest-risk borrowers who have missed three payments or more, own or occupy their property, and have not filed for bankruptcy.

This program creates a fast-track method of getting troubled borrowers to an affordable monthly payment where affordable is defined as your first mortgage payment including homeowner association, condo dues of not more than 38 percent of the household’s monthly gross income.

This affordable payment will be achieved through a mix of reducing the mortgage interest rates, extending the term of the mortgage, or even deferring payment on a part of the principal.

JEFFREY BROWN: A number of private banks are testing or have started loan-modification programs of their own.

Today’s announcement by Citigroup will target borrowers still current on their mortgage payments but at risk for falling into foreclosure.

And we assess these new approaches now with Faith Schwartz, executive director of the Hope Now Alliance, a group representing many of the biggest mortgage lenders and servicers. The group worked with the government on the plan announced today.

And Bruce Marks, CEO of the Neighborhood Assistance Corporation of America, a nonprofit homeowner advocacy group.

Who gets help

Bruce Marks
Neighborhood Assistance Corporation
[V]irtually no one is going to be helped and is going to have such a minimal really impact, it's not even worth it.

JEFFREY BROWN: Well, Faith Schwartz, how many people would this plan help? And why is this the best way to reach them?

FAITH SCHWARTZ, Hope Now Alliance: Well, this is just one additional plan and tool in place to reach the most at-risk homeowners that are at risk of foreclosure. They're 90 days or more past due.

And we worked with the nation's largest investors, come to the table, come up with a streamlined approach that solves for affordability using rate, term, and principal deferral to get there. Having that uniformity in the market for this type of effort is significant for the industry.

JEFFREY BROWN: Do you have any sense of how many people this would reach of all those that are at risk, as you say?

FAITH SCHWARTZ: Right. Well, we think that a snapshot is probably a couple hundred thousand people over time will be eligible for this. Last month alone, we did help over 200,000 borrowers through various forms of modifications and repayment plans.

This, in essence, adds to those numbers and gets the most at-risk to make sure they don't fall through the cracks.

JEFFREY BROWN: Bruce Marks, what's your view of this plan? What does it accomplish? And where might it fall short?

BRUCE MARKS, Neighborhood Assistance Corporation of America: Jeff, this will help virtually no at-risk homeowners. I mean, just what Faith said, she says that 200,000 will be eligible. And their own records say one out of two may even be qualified.

So the fact of the matter is, is that when you've got millions and millions of homeowners at risk of foreclosure, over 10 million, even if you take their word on this, virtually no one is going to be helped and is going to have such a minimal really impact, it's not even worth it.

I mean, Jeff, the devil is in the details. And in this case, the devil has won, because when you look at the particulars, you're saying they're using 38 percent of one's income for a mortgage payment. Fannie Mae, their own standard on the conventional loans, is 28 percent to 32 percent. By their own definition, they're saying that 38 percent is unaffordable for most homeowners.

This is really not even worth going down the road. It's raising the false expectations for at-risk homeowners. And it's going to have -- you know, it's not dealing with the underlying crisis. The way to solve it...

Shortcomings of the plan

Faith Schwartz
Hope Now Alliance
What I think is really important here is this doesn't take away from the loan-by-loan reviews that are going on across the country every day and are already helping millions of borrowers

JEFFREY BROWN: But hold on, hold on, Bruce -- Bruce, before you go there, let me get some response. You've raised several things here now.

The first one he raised is that it's not reaching nearly enough people.

FAITH SCHWARTZ: Yes. Well, that's why it's a streamline effort. First of all, the major banks and lenders, many of them in the Hope Now Alliance, have agreed to do this to their own portfolio loans, as well, to reach the most at-risk borrowers, in addition to loans that are guaranteed by Fannie Mae and Freddie Mac.

JEFFREY BROWN: This doesn't reach -- let me be clear about it.

FAITH SCHWARTZ: Sure.

JEFFREY BROWN: My understanding is it doesn't reach people whose loans -- who hold securitized mortgages?

FAITH SCHWARTZ: Well, the announcement is a standard that's been set forth by major investors and lenders to make a standard in the market. That's the first time that everyone has come together to agree to a standard which is an important step forward for the industry. We have not had that.

We have had hundreds of different investors that require different ways to work through loan programs. This is a necessary step going forward.

What I think is really important here is this doesn't take away from the loan-by-loan reviews that are going on across the country every day and are already helping millions of borrowers; 2.5 million people have been helped since July of 2007. This will add to it.

And if adopted by other investors over time, this will be an incremental and a fast and efficient way to reach borrowers and help them to avoid foreclosure.

JEFFREY BROWN: And when you say "helped," the people who've been helped already, do you mean they've had their loans actually modified or extended?

FAITH SCHWARTZ: Modified or in repayment plans. In the subprime market, there's a pretty high number of modifications as a percentage of workouts. And in the prime market, there have been more repayment plans than modifications.

This will shift some of that, because now these loans are being restructured through rate, through term and principal deferral to help make an affordable payment for the borrower and keep them in their homes, if they have income and they're willing to make an affordable payment. It's a big step forward.

JEFFREY BROWN: OK. Bruce, go ahead.

BRUCE MARKS: Yes. Look, the one person in this administration who's got the most credibility is Sheila Bair, chairperson of the FDIC. For three years she's been saying to everybody, "It's the foreclosures, stupid. We have to make the mortgages affordable."

Let me read a quote from her of her response to what the proposal is. Quote, unquote, "This falls short of what is needed to achieve widespread modifications of distressed mortgages." That's a quote.

The one person in this administration who has put forth a solution, the Sheila Bair solution when she took over IndyMac, was to use a 31 percent debt-to-income ratio, was to do it over the long term. Sheila Bair has said, "I won't even stand up in support of what this initiative is."

And when these servicers say that they've restructured 2.5 -- or worked out 2.5 million mortgages, if that was true, we wouldn't be in this crisis together.

And there's one more point I would like to make on that, and that is remember what they're saying. They're saying you have to be 90 days late, Jeff, to even get the opportunity to get the assistance.

What the government is saying to all those hard-working Americans, they're saying, "Don't make your mortgage payment. Be late. Be 90 days late. Go into foreclosure, because that's the only way we can provide any kind of assistance."

That is the most perverse sort of incentive that they're putting out there. It's dead wrong.

When the feds should step in

Faith Schwartz
Hope Now Alliance
All the announcements that are in the market are additive. They own their own portfolios. That's extremely helpful. So more people will get help through the comprehensive efforts going on in the industry.

JEFFREY BROWN: All right, let me pick up on that last point. Why not jump in earlier before the 90 days? My understanding of what Citigroup announced today, for example, is that they will step in with a moratorium for people who are at risk of becoming delinquent. Your plan, you have to already be delinquent for 90 days. Why not step in earlier?

FAITH SCHWARTZ: Right. So this plan is a piece of the puzzle that will help the most distressed borrowers who may not even be calling their loan servicer or in contact and will go to foreclosure.

There are numerous efforts underway, and many of the vast majority of loan workouts are prior to the 90 days already.

They take in a lot of information on expenses from the borrower, income, and other data, and it goes back and forth, and it's a long process, but it's effective.

This is meant to help the ones that fall through those cracks that are not calling their servicers, the ones who can get helped quickly, build capacity in the system.

And also, on the prime mortgages, the trends are higher in delinquencies in these Fannie Mae and Freddie Mac loans, and this should help those people get supported more.

This is meant to be an additional tool. It absolutely -- I agree with Bruce. It is not the only answer. But Sheila Bair and IndyMac have done a great job leading with their effort and model, and a lot of this has been taken place after the IndyMac model.

JEFFREY BROWN: Well, what about the other fact he cited from Sheila Bair on the IndyMac...

FAITH SCHWARTZ: Yes, I haven't -- I haven't read that, but...

JEFFREY BROWN: No, but, I mean, in the IndyMac case, they started at this 38 percent of monthly income, and that apparently didn't work, and she brought it down eventually to 31 percent. You're staying at the 38 percent in the plan announced today.

FAITH SCHWARTZ: Well, I think the investors, Fannie Mae and Freddie Mac and their regulator, and Hope Now came together with other leaders to try to get an affordable standard in the market.

If the loan-by-loan, that doesn't work, they can go lower all day long. And this does complement the Citibank announcement, Chase, Bank of America. All the announcements that are in the market are additive. They own their own portfolios. That's extremely helpful. So more people will get help through the comprehensive efforts going on in the industry.

Issues behind changing rates

Bruce Marks
Neighborhood Assistance Corporation
Until the servicers say that we're going to reduce the interest rate to six percent, five percent, four percent, or three percent permanently, and it's going to be a fully amortizing loan, then there's no real solutions out there.

JEFFREY BROWN: So, Bruce Marks, what do you want to see done now?

BRUCE MARKS: Right, I mean, this thing is much simpler than what everybody says it is. What we have to do is we have to restructure mortgages to what a homeowner can afford. It can be based on their budget or on a ratio.

But then you've got to lock it in. And what they're doing is they're not reducing interest rates permanently; they're just saying it's going to be reduced for a short period of time.

The problem is we're getting to a point where it's on a tipping. It will tip over to -- the fact of the matter is, people will start throwing their keys back at the servicers, saying, "Because I owe more than what the property is worth, I'm not going to stick in there."

Until the servicers say that we're going to reduce the interest rate to six percent, five percent, four percent, or three percent permanently, and it's going to be a fully amortizing loan, then there's no real solutions out there.

And the fact of the matter is, that's what they need to do. These are creating false expectations. But we talk about these ratios, and, what, 33 percent, 31 percent. The fact of the matter is, after the mortgage payment, people have to have enough money for food, for clothing, for transportation.

JEFFREY BROWN: All right.

BRUCE MARKS: Fannie Mae has already said 38 percent does not work.

JEFFREY BROWN: OK. We have time for a response to that.

FAITH SCHWARTZ: Yes, I just want to clarify, this actually does reduce the rate as low as Bruce has said, and that's part of the combination of what's being offered here.

BRUCE MARKS: But not permanently it does not.

FAITH SCHWARTZ: Right. So the program has outlined that it will be for five years to reduce significantly the rate as much as needed to meet that affordability target. And then, as it steps up, it is just one percent a year until it's the lower of the note rate or the Freddie Mac current yield.

So it is meant to be a market rate...

BRUCE MARKS: But if the...

FAITH SCHWARTZ: ... excuse me, Bruce -- a market rate at the end of that and not to have any rate shock for the borrower. This really is intended to be affordable, and get people through a hard time, and work with all the tools. I think it's a great step forward...

JEFFREY BROWN: All right, Bruce, very quickly. Very quickly, Bruce.

BRUCE MARKS: Thank you. It's not real. If you need to reduce the payment, lock it in, because people will stay in their homes if they have an affordable payment over the long term.

JEFFREY BROWN: OK.

BRUCE MARKS: If they think it's going to increase, they're not going to stay in their homes, and we're going to have many, many more foreclosures.

JEFFREY BROWN: All right, I promise we will continue this discussion as the government does. Bruce Marks and Faith Schwartz, thanks very much.

FAITH SCHWARTZ: Thank you.