The New York Times
August 19, 2010
There is a lot of grim economic news out there, including Thursday's report that initial claims for unemployment insurance rose to half a million people last week. The news on housing -- where the financial crisis began -- is also bad. And the government's response to high foreclosure rates continues to fall far short of what is needed to help Americans hold on to their homes and to stabilize home prices.
In July, for the 17th month in a row, there were more than 300,000 foreclosures filings, including default notices, auction notices and bank repossessions, according to RealtyTrac, a marketer of foreclosed properties. Over the past eight months, bank repossessions have surged. In July, 92,858 homes were repossessed.
As repossessed homes are put up for sale, house prices are likely to fall further. As prices fall, more borrowers end up "underwater" -- owing more on their mortgages than their homes are worth. That's a big risk factor for default, especially when coupled with high unemployment. Moody's Economy.com estimates that 1.9 million homes will be lost this year, down only slightly from 2 million in 2009.
Unfortunately, there is no evidence that the Obama administration's efforts to address the foreclosure problem will make an appreciable dent. Its main program -- which pays lenders to modify bad loans -- was started over a year ago. So far, only 398,198 loans have been permanently modified. Of the $30 billion allotted to the program, only $321 million has been spent so far.
Part of the problem is poor administration. Homeowners, who apply to their bank or mortgage service company, complain about confusing procedures and lost paperwork. Banks have complained of frequent rule changes from the government.
Obama administration officials have blamed the banks for poor customer service while also arguing that this is inherently difficult to manage; lenders have had to establish new systems and hire people to undertake difficult case-by-case analyses to determine who qualifies for a loan modification. The program's inspector general recently faulted the Treasury Department for failing to set clear goals and benchmarks for the program.
Another big problem is that many lenders, whose participation in the program is voluntary, have been reluctant to aggressively rework bad loans. Reducing a loan's principal balance -- rather than lowering interest levels or extending payout periods -- is often the best chance of keeping underwater borrowers in their homes. Banks have been loath to accept the bigger losses that come with lowering principal. Fearing that banks will drop out of the program altogether, the Treasury has not pushed them hard enough.
The administration has recently begun other, more promising antiforeclosure efforts. So far, they are too small to make a big difference. A total of $4.1 billion has been committed this year for state-based efforts to help unemployed or underwater borrowers in 18 states (and the District of Columbia) that have been hit especially hard by joblessness and falling house prices. About $2 billion worth of projects have been approved and are expected to help 140,000 borrowers.
State efforts to help the unemployed may be easier to implement because they are more likely to involve temporary cash assistance to help pay mortgages, rather than loan modifications. Helping underwater borrowers achieve principal reductions, however, may prove as difficult on the state level as it has been in the federal program.
If these initial state-based efforts are successful, the administration must keep expanding them. The nation badly needs an antiforeclosure plan that is, finally, up to the scale of the problem.