Foreclosures continue to outpace government efforts to rescue struggling homeowners.
Lenders foreclosed on 256,944 homes in the first quarter, up 9 percent compared with the final quarter of 2009 and 35 percent above the first quarter of last year, according to statistics compiled by RealtyTrac. The increase comes after a lull that analysts had attributed to delays in processing loan modification requests and the sheer volume of borrower defaults.
“We’re not surprised to see [the foreclosure increase],” Daren Blomquist, a spokesman for RealtyTrac, told the Washington Post. “We thought this would be coming, we just didn’t know when.” The company estimates that foreclosures will top the 1 million mark this year, despite ongoing government efforts to stem that tide.
To date, lenders have modified the mortgages of 230,000 borrowers under the Home Affordable Mortgage Program (HAMP), the Obama Administration’s flagship foreclosure prevention initiative. But that represents only about 21 percent of the 1.2 million borrowers who entered the program over the past 12 months. Meanwhile, another 150,000 borrowers who received temporary modifications “fell out” of the program, either because they could not make their restructured payments or because lenders determined that they did not qualify for the assistance. A recent Treasury Department report also found that recipients of loan modifications are defaulting in increasing numbers – a trend department officials said they couldn’t explain.
HAMP also got another poor review from the Congressional Oversight Panel (COP) that is monitoring government assistance efforts. “For every borrower who avoided foreclosure through HAMP last year, another 10 families lost their homes,” COP said in its most recent report, adding, “It now seems clear that Treasury’s programs, even when they are fully operational, will not reach the overwhelming majority of homeowners in trouble.”
The COP report estimates that HAMP will end up assisting only 1 million borrowers, at most – well short of the Administration’s goal of keeping 4 million foreclosure-threatened borrowers in their homes. The oversight panel’s report was particularly critical of HAMP’s failure, to date, to reduce the principal balance of loans – a strategy that many analysts have insisted is essential to provide permanent rather than temporary relief to borrowers.
Reducing interest rates rather than loan balances benefits lenders (who avoid writing down assets) and servicers (because interest rate reductions have a smaller impact on their cash flow), the COP report notes. But this approach “comes at the expense of a higher redefault risk” on loan modifications, the report says, “a risk that is borne first and foremost by the homeowner but is also felt by taxpayers funding HAMP.”
Responding to the oversight report, administration officials agreed that the foreclosure rate remains “unacceptably high,” but insisted that HAMP is making progress. The number of “active” modifications increased by 35 percent in March compared with the February totals, and an additional 108,000 permanent modifications are in the queue, awaiting final approval, according to Treasury Department statistics.
“One percent of these loans defaulting is a tiny fraction,” Shaun Donovan, secretary of Housing and Urban Development, told the New York Times. “Given how stressed these borrowers are, even in the best situation,” he added, “there will be re-defaults. But I don’t think there is any evidence that would cause us to worry at this point.”
Recent changes in the program, targeting homeowners who have lost their jobs and those whose loans are under water, should improve the results, Administration officials say.
RETURN OF FAIR LENDING
Lending discrimination, which has not received much attention from federal regulators in the recent past, has become an enforcement priority for the Obama Administration. Operating with a newly established “Fair Lending Unit,” the Department of Justice (DOJ) has 39 active discrimination cases under way, 29 of them referred by federal bank regulators, according to Assistant Attorney General Thomas Perez, who heads the DOJ’s Civil Rights Division.
“Fair lending enforcement is a top priority for Attorney General Eric Holder and for us in the Civil Rights Division, as we continue to grapple with the fallout from the housing boom and subsequent foreclosure crisis,” Perez said during a recent fair lending forum in Chicago. The forum is one of several planned by the President’s Financial Fraud Enforcement Task Force, to publicize federal fair lending enforcement actions and to highlight interagency efforts to target predatory lending activities that contributed to the financial meltdown and the collateral housing market damage stemming from it.
Recent anti-fraud initiatives include a $6 million settlement with American International Group resolving allegations that the company allowed mortgage brokers to charge “excessive fees” on home mortgages to African American borrowers. Perez termed this “a landmark case” that, he said, “sends a clear signal to lenders that they must take steps to ensure that brokers with whom they partner do not engage in discrimination.”
In related fair lending developments, the NAACP has dropped a suit against Wells Fargo, accusing the bank of engaging in “systematic, institutionalized racism” by illegally steering minority home buyers into higher-cost subprime loans mortgages. To end the litigation, Wells Fargo has agreed to submit annual reports to the NAACP providing detailed lending, credit quality and demographic information, including a “report card” describing the diversity of the bank’s suppliers. The bank has also agreed to follow “fair lending principles” and to eliminate policies or practices “that encourage biased and exploitative behaviors toward borrowers.”
The NAACP is continuing to pursue fair lending litigation against 14 other lenders, including HSBC Holdings and JPMorgan Chase. Benjamin Todd Jealous, president of the civil rights organization, said he hopes the agreement with Wells Fargo will encourage other banks to reach similar out-of-court settlements. “Our goal is to get a maximum assurance for consumers that the past crisis in the mortgage industry won’t be repeated,” Jealous told the Wall Street Journal.
MORE HAMP CHANGES
Struggling to boost the still discouraging results of the government’s foreclosure prevention efforts, the Obama Administration has unveiled another round or changes in the Home Affordable Mortgage Program (HAMP). The changes, slated to be implemented in the fall, encourage lenders to reduce the principal balance on “under water” loans and target second liens, which critics have argued undermine the effectiveness of loan modifications approved for first mortgages.
Four of the nation’s largest loan servicers have agreed to accept “proportional modifications” on second loans, but only when the first mortgage is modified and the primary lender agrees to a similar principal reduction. The four lenders – Bank of America, Citigroup, JP Morgan Chase and Wells Fargo control 60 percent of the residential servicing market, according to statistics compiled by Mortgage News. So their agreement to participate in the Administration’s second lien modification program (“2MP”) is significant. But publicly and privately, these banks are resisting calls for the broad-based principal reductions that consumer advocates and many economists are urging.
Testifying recently at a House Financial Services Committee hearing, David Lowman, chief executive officer for home lending at JPMorgan Chase, argued that overhauling mortgage contracts creates a dangerous moral hazard that lenders will be unwilling to accept.
“If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined,” Lowman said in his written testimony, “what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risks?”
Making the same point more gently, Barbara Desoer, president of Bank of America Home Loans, said principal reductions would be costly and must be implemented “in a measured, responsible way “ balancing the interests of borrowers and investors, and ensuring that “only customers with a legitimate hardship and genuine interest in maintaining homeowners hip qualify.” Echoing that concern, a Wells Fargo executive said principal forgiveness should not be viewed as “an across-the-board solution.”
Alan White, assistant professor at Valparaiso University School of Law, who was among the first to fault HAMP for failing to include principal reductions in its modification strategies, fired back at the bankers’ arguments, accusing them of “attacking a straw man. Nobody is arguing for across-the-board principal reduction,” he said. As for the moral hazard argument, White said, “the point about the sanctity of contracts is okay,” but it doesn’t do much to solve the problem. “The moral absolutism of the contract doesn’t advance the discussion of how you deal with a national crisis,” he told Huffington Post.
GSE RESTRUCTURING: WHAT DO YOU THINK?
Resisting Republican demands to move more quickly on overhauling the nation’s housing finance system, the Obama Administration is seeking public comment on how best to restructure Fannie Mae and Freddie Mac, the mammoth Government Services Enterprises (GSEs) that currently anchor the secondary market for home mortgages.
“A well-functioning housing-finance system is critical to the long-term stability of the housing market,” Treasury Secretary Timothy Geithner said in announcing the request for public comments. “Hearing from a wide variety of perspectives as we embark on this process is an important part of establishing a more stable and sound housing finance system for the American people.”
The Administration is seeking comment on seven broad questions dealing generally with the role government should play in the housing finance system and specifically with how Fannie and Freddie should be structured, whether the government should guarantee their debt, and what steps government should take to increase consumer protections in the housing finance arena.
Republican lawmakers have been complaining for months that the Administration has been intentionally dragging its feet in developing a plan to restructure Fannie and Freddie, which have been operating under government conservatorship since September of 2008. As the GSEs have assumed a central role in the government-backed foreclosure prevention initiatives, Administration officials have backed off of initial promises to unveil a restructuring plan for them by early this year. Geithner has said he plans to propose that plan next year.
“It appears that the Administration is using Fannie and Freddie as a backdoor conduit for appropriating billions of dollars of taxpayer money without the consent of Congress,” Reps. Darrell Issa (R-CA) and Jim Jordan (R-Ohio) wrote in a letter to the President a few weeks ago. “If this is true, the American people have a right to learn about it in a transparent public forum where those responsible for the policy can be held accountable.” The legislators are sponsoring legislation requiring the Administration to include in the budget the government’s obligations for the GSEs. The Administration’s failure to present a restructuring plan is “unacceptable,” Issa and Jordan complain in their letter.
But Administration officials have cautioned against moving too quickly to restructure Fannie and Freddie while the financial and housing markets are struggling to recover from the subprime-induced crisis. “We must proceed very carefully to avoid undermining the stability that has been achieved,” HUD Secretary Shaun Donovan testified recently at a House Financial Services Committee hearing.
Rep. Barney Frank (D-MA), the committee’s chairman, echoed that concern. While he agreed with the “broad consensus” that Fannie and Freddie should be eliminated, Frank also said that “simply ending [the GSEs] with no idea of a replacement, would do damage at a time of economic difficulty.” Frank said he intends to begin drafting GSE-related legislation “very soon.”
GOVERNMENT HOUSING SUPPORT – YES!
While lawmakers, consumer advocates, and housing industry executives differ sharply between and among themselves on how Fannie Mae and Freddie Mac should be structured – and whether they should exist at all, a recent poll found strong public support for a continued an strong government role in the nation’s housing finance system. In the poll, conducted for the National Association of Home Builders, 68 percent of the respondents agreed that government should continue to support housing and 65 percent said they thought the federal government should be doing more to prevent foreclosures.
The results showed surprisingly little difference in the views expressed by homeowners and renters. For example, 84 percent of renters agreed that government should do more to prevent foreclosures – a view shared by 65 percent of existing homeowners. First-time home buyers are particularly concerned about the issue -- 78 percent of young adults under the age of 30 and 69 percent of adults between 30 and 44 (“the prime age range for move-up buyers,” according to the NAHB) support more foreclosure protection. Not too surprisingly, 78 percent of all potential home buyers, including 81 percent of renters intending to buy a home in the near future, agreed that government should continue to support housing.
