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The government looks at ways to offset foreclosures

By
Real Estate Agent with RE/MAX Hometown

The Obama administration is promising an aggressive fight against the rising tide of home foreclosures, but officials have yet to decide what strategy -- or combination of strategies -- they will use.


Among the possibilities being pushed by various interest groups are a six-month foreclosure moratorium, a doubling of the mortgage interest deduction, a tax credit for those who buy homes and a federally sponsored mortgage refinancing program.

But it's been almost three years since foreclosures began to mount. And government and the financial industry have been unable to agree on a plan largely because they cannot resolve a central issue: How should losses be divided between borrowers and lenders?

The challenge for the White House will be crafting a foreclosure prevention package that promotes refinancing without unfairly benefiting irresponsible borrowers or lenders.

Last week, Lawrence H. Summers, the former Treasury secretary who is Obama's pick to direct the National Economic Council, wrote a letter to congressional leaders stating the administration would commit $50 billion to $100 billion "to a sweeping effort to address the foreclosure crisis."

The fine print of the letter, however, indicates that the administration does not plan to help everyone with mortgage trouble. It specifies that "preventable foreclosures" will be targeted and states that aid will go to "economically stressed but responsible homeowners." Just how the administration will separate those worthy of assistance from the lost causes is among the details yet to be determined.

"They're just getting started," said Steven Adamske, spokesman for the House Financial Services Committee. It's too early to know, he said, what foreclosure relief measures may emerge as law.

UC Berkeley economist Kenneth Rosen met with the Treasury Department's transition team this month to present his ideas for addressing the housing crisis.

Rosen presented a plan to declare a six-month foreclosure moratorium during which officials could figure out criteria for determining which mortgages could be saved and which couldn't. For worthy borrowers, he favors government-sponsored mortgage refinancing at an interest rate of 4.5%. To encourage home purchases, he proposes a tax credit for those who buy homes this year.

But Rosen said he was unable to pick up any hints about specific changes that might come to fruition. "There's so much going on, negotiating with the House and Senate," he said.

Last year a $7,500 federal tax credit was created for first-time home buyers, but the credit must be repaid. Various industry groups such as the National Assn. of Home Builders and National Assn. of Realtors have called for eliminating the repayment requirement and adopting a tax credit based on a percentage of the home purchase price, with a maximum amount of $22,500. The groups also favor allowing all home purchasers, not just first-time buyers, to receive the credit.

John Burns, a prominent Irvine consultant to home builders, has proposed a more targeted tax credit that would match down payments up to $15,000. Burns contends that such a credit would encourage the borrower to put up a greater personal stake in the purchase, and he favors making the credit subject to "recourse" if the borrower defaults. In some states, such as California, home mortgages are generally treated as non-recourse loans, which means that when borrowers default, they can lose their home and collateral but are not required to repay the full loan amount.

Burns also proposes temporarily doubling the mortgage interest deduction for all homeowners. He says such a measure would help those who may be on the brink of default, but it would also give others more disposable income, which would stimulate the overall economy.

Many of those proposals would help builders and lenders, which would still be repaid the full amount of mortgage principal owed to them.

It is not clear, though, how much such proposals would help borrowers whose mortgage debt is higher than their home is now worth.

In Congress, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, tried to address the problem of such homeowners last summer with his "hope for homeowners" program, but it has had limited effect. This month, he proposed using funds from the $700-billion federal financial bailout program to address foreclosures through a number of measures, including a program to guarantee loan modifications. Another proposed program would pay down second mortgages that may be hindering a workout of a troubled first mortgage.

The Obama administration has recently been more specific in supporting one foreclosure prevention measure viewed by backers as among the most powerful tools to help distressed borrowers, but long opposed by most lenders. It's a proposal to allow bankruptcy judges to order banks to reduce the principal that people owe on their homes.

President Obama has said he supports such reform. Most mortgage bankers oppose giving judges such power, saying it would lead to higher mortgage interest rates. But fair-housing groups say it would prevent hundreds of thousands of foreclosures.

Industry opposition to the idea has faded recently, as the National Assn. of Home Builders said last month it would remove its opposition, and this month, Citigroup Inc. said it would back such bankruptcy reform.

Still, with the banking industry in an ever more fragile condition, it is possible that the government will hesitate to force lenders to take the losses on the bad loans they hold without causing an even more widespread financial collapse.

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Show All Comments Sort:
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

Thanks Mark. The Banksters have not been bargaining in 'good faith' to write down any amount of principle. The revised Bankruptcy rules will be welcomed addition to the box of tools available to correct the current problems in the housing market.

Jan 26, 2009 05:05 AM
Donna Shuman
Florida Wholesale Realty Corp - Oviedo, FL
REALTOR - Marketing for Richard Shuman - www.SKIPtheBULL.com

Every politician from the city councilman to the president seems to have their own idea of what to do about this mess we're in but they're afraid to take a strong stand on any "cure" for fear it won't work and the voters won't like them anymore

I'm beginning to think that they all figure if they argue about it long enough, the problem will resolve itself and they can stand there and say, "See, I told you so." without having to really say anything.

It's amazing some of these people can tie their own shoes without taking a census poll first.

No bitterness here.

Jan 26, 2009 05:07 AM
Kathy O'Neal
The Kathy O'Neal Team - RE/MAX Executives - Chantilly, VA
A great experience & a happy end result.

Mark,   

Thanks for taking the time to provide this informative summary.

It is taking some time to formulate some combination of the strategies you have outlined because of the complexity of the problem and the trade-offs inherent in any course of action, as well as the copeting interests at play, not to mention the dysfunctionality of the bureaucracies involved.  But clearly, a well-conceived and workable solution is needed. 

This is one we are all watching closely.

 

Jan 26, 2009 06:24 AM
Barry Cavalancia
Realty Executives Associates - Wayzata, MN

Does any of us really believe our government is going to bail out consumers who need assistance to prevent foreclosure? No Realtor I know thinks this.  Consumers facing foreclosure usually have either loss of income, not enough equity to refinance,or a credit score that prevents a refinance.  Banks have been entrusted with our government bailout funds to assist these folks but have used the funds elsewhere as the folks who need the assistance can't fit into the current mortgage guidelines for any sensible loan modification.  The government did not bail out those in the late 1980's and most likely will not do so today.  We will get beyond this in the next year or so. 

Jan 26, 2009 06:55 AM
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

I feel whoever termed the word "tax credit" did everyone a disservice as it was a loan, not a credit.  I think the foreclosure problem is going to be hard to stem the tide until people have jobs, feel secure in these jobs, and have some excess cash to resume spending again, and none of these three items will occur in magintude in the next two years.

Jan 26, 2009 07:05 AM
Kathy Opatka
RE/MAX CROSSROADS - Ocean City, MD
Serving Ocean City, MD, & The Delaware Beaches

Mark,

Great research! Thanks for gathering it all together in one blog for easy reading!

Kathy Opatka, Re/Max Premier Properties, OCEAN CITY, MARYLAND

Jan 26, 2009 07:43 AM
JB Brookman
JB Brookman Photography - Franklin, TN
High School Senior Portrait Photographer

Mark-

Very informative reading on the mortgage meltdown and foreclosure market.  I agree with Mr. Adamske- that they are just getting started and it is still too early to know.  In the meantime, rates are very attractive to many families looking to take advantage by refinancing.

Jan 26, 2009 08:06 AM
Lynne Ruffin
Lynne RUFFIN - Norfolk, VA
Web Styles

I will stay optimistic that this fight will be won with loan modifications working better than we could ever imagine and aiding in bringing this economy back stronger than it has ever been with sustainable growth. 

By the way, I would also like to see some info on the role increased property assessments and property insurance costs has played in this foreclosure crisis.  If you can provide a link to an article, blog, or resource I would be most appreciative.  If the assessed value of a home increased 100% during the up times then logically the assessment probably would have increased as much as well.  What role will this play in a loan modification?

Jan 26, 2009 09:20 AM
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

The banks and the homeowners need to modify there loans. Let the homeowners stay if they can refinance at current market conditions. Then the foreclosure's stop, the banks still have a loan.

I am not in favor of the gov't negotiating these. What a mess that would be.

As the homes depreciate, a homeowner can't refinance because the current appraised value is not what they paid.

Jan 26, 2009 09:25 AM
April Stephens
RE/MAX One Realty - Clayton, NC
Broker/Realtor - Johnston & Wake County

Great Post, thanks for the info.  Unfortunately I do not see the banks trying to help themselves at all so why should the government?

Jan 26, 2009 11:39 AM
Isaac Bensussen
Pacific Coast Real Estate Group - La Jolla, CA

Mark:

Very interesting plans and solutions. A great compilation of ideas from the geniuses that control the Treasury and the Financial destiny of the USA. Unfortunately, this has been going on for many, many, months with no visible implementation of clear rules.  Every Lender acts their own way. No sets of standards.

It does not take a rocket scientist to find out who can afford and who can not afford their mortgage. Lenders keep on bouncing from one place to another. There are no rules. Everything is left in the hands of people that can not make a decision because they are afraid of making one or they are not empowered to make it. It's either a loan modification, a short sale or a foreclosure. If a short sale is agreed upon, then, because of the good faith effort that short sale borrowers are making, their credit report should not be affected or at the worst, only lightly affected. Make it a law.  

I am getting totally crazy with all the different proposals on the table. I agree with the proposal that Bankruptcy Judges should be able to modify loans, because as you mention, will save millions of people from foreclosure, but my thinking is, wouldn't it bring millions of people into Bankruptcy Courts? and if they can't afford their house payments, wouldn't it be better if they move back home?

Isaac Bensussen-www.besthomesinlajolla

 

 

 

Jan 26, 2009 12:55 PM
Kelsey Barklow
Hurd Realty - Johnson City, TN
423/948-9154

Great post and lots of great comments. I can only hope that someone in our government comes up with at least one good idea and then implements it!

Jan 26, 2009 12:57 PM
Simon Mills
Mills Realty - Toluca Lake, CA

Great posts and even better comments.  The government has messed this up enough.  Stay away and let the chips fall as they may.  Until this mess gets cleared up by the MARKET not the government we will continue to suffer.  Stop the government programs, get banks to respond to our offers and we can get the cleared up.

Jan 26, 2009 01:43 PM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

The only way for the government to stop foreclosures is to give away massive amounts of money to people that are in over their heads.  And it is peeling the band-aid off slowly.  Let it happen and get it over with. 

Jan 26, 2009 02:15 PM
Roland Woodworth
Blue Cord Realty - Clarksville, TN
Benchmark Realty

Mark: I spoke to a lender today with a home owner who asked for a 6 month moratorium and they delcined.

Jan 26, 2009 03:10 PM
Anonymous
Mark Phillips / mcploans

The contents in my blog are only ideas that the Obama administration, Congressmen and Senators have put forward in the past few weeks.  None of the ideas are currently laws or written policy.  I was simply trying to condense all of the information that is currently in the media.  I am fielding at least 10 calls a day from client and agent wanting to know what is next.  Maybe one of these is it.    

Jan 26, 2009 03:34 PM
#36
Brian Lee Burke
Kenna Real Estate - Lone Tree, CO
Broker & Advising Expert-Kenna Luxury Real Estate

Great discussion - I have been pondering this myself for some time, really trying to concentrate on the how to fix it rather than the blame game. I don't have answers, this is such a complex, deeply reaching problem. I agree with anonymus professions that have had declining incomes the last couple of year have been living of credit cards etc. and now are in big trouble - even if the foreclosure can be avoided how can they regain the income? Hard to find jobs that can match the previous salaries. We recently heard from somebody that had a great job at $150K/yr, a home, and so on. Now this person is out on everything, living with their parents, making $28K a yr.... where does it end? ~Rita

Jan 26, 2009 03:41 PM
Anonymous
Anonymous

Mark,

 

The biggest challenge is as you state trying to decide how to distrute the lossess on these bad loans between borrower, lender, and the third person really holding a firm line in this is the investor. I think the major problem is transparency. We really do not know who owns the mortgage. i suspect it is Hedge Fund Investors who are unwilling to loose their investment on these pool of bad mortgages. Until the investor is forced to take a loss just like everyone else we will have see nothing happen.

Jan 27, 2009 12:05 AM
#38
Anonymous
Steve

They are still giving money to the wrong people!  If this keeps up we will be using the "Bailout (Our tax payer money)  to build larger numbers of homeless shelters across the country, Government subsidized housing Projects, and bigger mansions for the Wall Street Bankers .....  Why is Congress so afraid to help people who are in jeopardy of loosing their homes????

Jan 27, 2009 02:29 AM
#39
Esko Kiuru
Bethesda, MD

Mark,

If bankruptcy judges brings down the mortgage balance to market is no different when the market itself takes it there. The lender will face a loss in either case. The judge's action just seems to work faster and thus help the market turn around sooner.

Jan 27, 2009 09:41 AM