A solution to the foreclosure crisis is proving to be about as elusive as a week without rain this summer.
Over the last two years, a number of programs have been launched by both state and federal agencies. Each has held out the promise of refinancing or modifying large numbers of troubled homeowners’ loans, but so far none have had anywhere near the desired effect.
The conventional wisdom underlying most of these efforts was that lenders would rather take a loss on a loan – either by refinancing it or modifying it—than see it go to foreclosure. For reasons that still aren’t entirely clear, that seems not to be the case. Now, policy makers are wondering whether giving money directly to unemployed homeowners might be one way to best help the most vulnerable to keep their homes.
Two years ago, my agency was one of the first in the nation to offer a refinancing program to help rescue people at risk of losing their homes. Along with a handful of other states, we were sure that our plan would work. But despite having the most generous program at the time, most applicants were too far underwater, or else their credit was irreparably damaged.
Soon thereafter, the federal government unveiled its nationwide Hope for Home Owners refinancing program, which expected to help more than 400,000 homeowners. In its first seven months, it helped one person. President Obama recently signed a bill that should improve the program’s usefulness.
Next up was the Making Home Affordable Program, which offered either a refinancing or loan modification. It was designed to help as many as five million Americans get some mortgage relief, but to date it’s helped only about 80,000. Of those, only about 20,000 are in the target demographic – people with loan-to-value ratios of more than 80 percent. The Obama Administration recently announced that it will allow LTVs to go as high as 125 percent, in order to help more people.
Modified Thinking
Refinancing gave way to loan modification as the best way to help struggling homeowners, but recently a report from the Federal Reserve Bank of Boston noted lenders’ reluctance to modify the terms of existing mortgages. Almost half of the borrowers who get a break from their lender end up delinquent again and about 30 percent of borrowers get themselves back on track without any help from the banks.
The Federal Reserve suggested that it would be more effective to give federal assistance directly to borrowers, instead of designing complicated incentives for the lenders to act philanthropically.
House Financial Services Chairman Barney Frank has proposed doing just that – providing up to $2 billion in loans directly to homeowners who are unemployed, in order to help them keep their homes.
While that concept is working its way through Congress, there is a precedent right here in Massachusetts (albeit with a different tactic), which shows that Rep. Frank’s idea has merit.
At MassHousing, all of our home loans with low down payments carry a mortgage insurance policy that pays the principal and interest payments for up to six months if a borrower loses his job. So far, 250 borrowers have received $900,000 in claims to help keep them in their homes, and not one of those loans has gone into foreclosure.
Keeping unemployed homeowners in their homes is usually a short-term effort that has a long-term impact. Homeowners get back on their feet quickly and avoid a costly and often devastating foreclosure. Barney Frank’s proposal is one more step toward the elusive foreclosure fix and is worthy of strong consideration.
