With home prices expected to keep falling in many parts of the country, experts said finding a fix for the underwater crisis will be difficult. Banks can’t afford to bail out homeowners without another bailout from the government. Even if federal help comes—either for the homeowner directly or for banks—taxpayers ultimately will be on the hook for the debt. Do nothing, and homeowners and communities continue to suffer.
One economist said it all boils down to one thing: sharing the pain. “At the end of the day, someone has to pay for this problem—either the lender, the homeowner or the public pays,” said Mark Zandi, chief economist for Moody’s Economy.com. “It is really about divvying up the cost, and that is very difficult politically to do.”
The Obama administration said last month it would allocate $1.5 billion to five states to create programs that target unemployed homeowners struggling to avoid foreclosure, as well as people underwater on their mortgages. The programs would also focus on helping people with second mortgages modify their loans.
Here’s a look at some other options and what experts say about them:
Principal reductions
One way to solve the negative equity problem is to simply get rid of it. That would require banks to modify loans—and write down the principal owed to reflect a home’s value on the current market. Proponents of this solution argue that it is more costly to continue the cycle of foreclosures. But lenders would face large losses if they wrote down large portions of their loans.
Zandi said some lenders are doing this when it makes sense. Under the Obama administration home loan modification program, lenders can write down or defer principal if the borrower’s debt-to-income ratio is greater than 31%. Principal write-downs typically are being done when the homeowner wants to stay in the house and the lender doesn’t think it can sell the house to recoup what is owed.
He also predicts lenders will engage in more short sales, where they write down the difference between what is owed on the mortgage and what a buyer is willing to pay, to avoid costly foreclosures.
Julia Gordon, senior policy counsel for the nonprofit Center for Responsible Lending, agrees that principal reduction is one of the better ways to start healing the housing market.
But it gets complicated when there are second mortgages or lines of credit, common when economic pressures left little equity in some people’s homes. She said there is often a conflict of interest when the mortgage, or first lien, is held by one lender and the second is held by a different one. Lenders often don’t want to approve reducing principal on the first lien unless the second lien holder also takes a hit. “If the second liens disappear, that would clear servicers to do more principal reductions,” she said.
Rick Sharga, senior vice president of RealtyTrac Inc., an Irvine, Calif.-based foreclosure website, said he doubts that banks will write down principal in large numbers. “Many are in a capital position where they can’t afford to do that,” Sharga said. “The glimmer of hope is we figure 2010 will be the peak of foreclosure activity.”
RealtyTrac expects 3.5 million properties nationally to receive a foreclosure filing this year, up from 2.8 million last year.
Stabilize home prices
Gail Madziar, spokeswoman for the Michigan Bankers Association, said some banks are even leasing homes they foreclosed on back to the original owners to help stabilize home prices and neighborhoods.
Another way to stabilize prices is to control the release of distressed inventory onto the market. Banks have been doing this in recent months to slow the erosion of home prices and minimize the losses they record on their books.
Help for unemployed workers
The Mortgage Bankers Association announced recently that it was considering a program to help qualified borrowers who have lost their jobs so they can stay in their homes while they seek new employment.
The forbearance program would have loan servicers reducing the borrower’s mortgage payment for up to nine months. The payment would be reduced to an affordable level based on household income.
John Courson, president and CEO of the association, said that the average U.S. worker is unemployed for up to seven months and that is a long time for a homeowner to stay current on the mortgage with such a large drop in income.
“Further, borrowers with such a precipitous drop in income can’t qualify for most loan modification programs, so we are looking for ways to allow those borrowers to keep their homes while they look for another job,” he said.
The association has asked the government to add this tool to the Home Affordable Modification Program to help the swelling ranks of unemployed people.
Gordon of the Center for Responsible Lending said another solution might be to provide a low-cost loan fund like one in Pennsylvania that unemployed homeowners can tap into to pay their mortgages. The Homeowners’ Emergency Mortgage Assistance Program was created in 1983 to prevent homelessness in Pennsylvania by offering loans of up to $60,000 for 24 months. In times of high unemployment, the loans extend to three years.
Freeze foreclosures
Michigan state Sen. Hansen Clarke, a Democrat who sponsored 90-day foreclosure moratorium legislation that took effect last July, said he thinks judges should be given the power to temporarily suspend foreclosures for up to two years. “Look at all the people who have had to walk away from their houses. I get so angry when I see these neighborhoods, because action could have been taken,” Clarke said.
Gordon said a temporary suspension could be helpful if servicers use that time to evaluate the homeowner for a loan modification. Now, the foreclosure process and evaluation process generally are happening at the same time, sending mixed messages to homeowners.
Tim Ross, president of Royal Oak, Mich.-based Ross Mortgage, said that more mortgage loan servicers are eager to keep people in their homes these days and that could go a long way to solving the negative equity problem.
On top of that, new household formation, which occurs when young adults leave home to set up their own places or when people get married or divorced, continues to create demand for new homes. And with new home building at a standstill, demand driven from household formation should absorb what’s in the market, he said.
“Despite the fact that we have outmigration, there are fundamentals in place that will ultimately rescue us,” Ross said.
(c) 2010, Detroit Free Press.
Distributed by McClatchy-Tribune Information Services.
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