This article first appeared in the St. Louis Beacon, Feb. 18, 2009 - Here's the big question regarding President Barack Obama's massive $75 billion government effort to stem the foreclosure crisis: Will it work?
"There's no telling, but I think this is a better blueprint than anything we've had so far,'' said Karen Wallensak, executive director of the Catholic Charities Housing Resource Center in St. Louis.
Wallensak, whose nonprofit agency counsels troubled borrowers, said the plan offers many positives, including helping responsible homeowners before they become delinquent on their loans -- an effort that could slow the tide of foreclosures.
"It does not enable those who overstretched; it's not rescuing people who should not be rescued," Wallensak said. "There are still going to be people who lose their homes. There's nothing you can do for somebody who has no income. But for many people this is the best shot we've seen in a long time."
While Obama reiterated what economists have been saying all along -- that stemming the tide of foreclosures is vital to turning around the economy -- analysts say so many dominos are falling these days, it is hard to say just what effect any one action will have.
"At the same time that you have a home in foreclosure, that home may be owned by someone who works in the automobile industry who gets laid off from work,'' said Robert Cropf, an associate professor of public policy studies at St. Louis University. "So even if you solve their mortgage payments, they're still going to have a lot of trouble paying for it. It's going to be hard to disentangle the effects as they happen over time.''
In a nutshell, the Obama foreclosure intervention program -- called the Homeowner Affordability and Stability Plan -- would work to keep 7 million to 9 million Americans from losing their homes. The program, set to start March 4, would offer subsidies to lenders to modify 3 million to 4 million sub-prime and high-interest loans by reducing monthly mortgage payments to "sustainable" levels. "Sustainable" is defined as no more than 31 percent of a homeowner's pre-tax income.
St. Louis executive director of development Barbara Geisman praised Obama's plan. "It sounds like it addresses a big gap in what the federal government had been doing," she said. "I think this gets at all these problems and provides real help to real people."
Under the Bush administration, Geisman said, the feds provided some money to counsel troubled homeowners, but nothing to help them get caught up on payments or pay for refinancing. The city had started a program a year ago that earmarked $500,000 for counseling, and up to $1,500 to help a homeowner get caught up.
Obama's program provides some incentives for banks to work with those homeowners. "It sounds like this should plug right in with what the city has been doing," Geisman said.
Righting "upside-down" loans
In his speech Wednesday morning in Mesa, Ariz., the president acknowledged that his foreclosure initiative would not save every home but would give millions of families a chance to rebuild.
"In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen -- a crisis which is unraveling homeownership, the middle class and the American Dream itself," Obama said.The plan takes the step of allowing Fannie Mae and Freddie Mac to guarantee refinancing for 4 million to 5 million homeowners with "upside-down" or "under water" loans -- who because of declining property values now owe more than their homes are worth. In tandem with the foreclosure announcement, the Treasury Department announced that it would increase its funding commitment to Fannie Mae and Freddie Mac, the mortgage giants bailed out by the government last year, and would continue purchasing mortgage-backed securities from them.
Chris Krehmeyer, executive director of Beyond Housing, a St. Louis nonprofit housing agency that counsels troubled homeowners, credits Obama with finally providing some of the solutions that housing counselors have long advocated -- such as ensuring that loan modifications result in affordable monthly payments. Too often, he said, lenders simply devise repayment plans that fail to address the issues homeowners have with bad mortgages.
Krehmeyer said the provisions to help "under water" homeowners are a positive step but won't have a large impact in the St. Louis region because it hasn't been a large problem here. While local housing prices have declined, they were never as inflated as in other parts of the country.
Krehmeyer warned that the plan appears to be limited to loans guaranteed by Fannie Mae and Freddie Mac and does not specifically address the complex pools of mortgage-backed securities.
By the numbers
The U.S. Foreclosure Crisis
2.3 million: Property owners who received some type of foreclosure notice in 2008, an 81 percent increase from 2007.
13.8 million: Homeowners who owe more on their mortgages than their houses are worth (just under 14 percent).
274,399: Property owners who received foreclosure notices in January, up 18 percent from January 2008.
Source: RealtyTrac, Moody's Economy.com
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"It does not touch the securitized world, as near as I can tell," Krehmeyer said.
Wallensak also noted that the lion's share of homeowners she counsels do not have mortgages held by Fannie and Freddie, but she hopes the plan has enough enticements to convince private lenders and the servicers of mortgage pools to work with borrowers.
"If this works, we can learn as we go through this process so we can do more with the mortgage-backed securities mess,'' she said.
Krehmeyer and Wallensak expressed concerns that the plan offers financial incentives to loan servicers but has no provisions for nonprofit housing counselors who are doing the bulk of the work in representing borrowers. In many cases, they say, it was the unwillingness of servicers to work with homeowners that led to people losing their homes.
"I'm not sure the servicers have had that 'Come-to-Jesus' moment,'' Wallensak said. "Maybe this will help them get there.''
Cropf said that while Obama seemed to be walking a careful path with his rhetoric -- suggesting incentives to entice lenders to modify bad loans -- the president did make mention of a stick: administration support for reforming the nation's bankruptcy laws to allow judges to reduce home mortgages on primary residences to their fair market value, as long as borrowers pay their debts under a court-ordered plan.
With so-called "toxic mortgages" at the heart of the recession, Obama's plan has been highly anticipated by both lenders and borrowers. Last week, a host of lenders, including giants JP Morgan Chase & Co., Citigroup Inc. and Wells Fargo, announced a temporary halt to foreclosures.
In 2008, 2.3 million U.S. property owners received foreclosure notices of some type, according to RealtyTrac, and with one of every 10 U.S. homeowners delinquent on mortgage payments or in arrears, researchers expect the foreclosure rate to increase this year. An eye-opening report by Credit Suisse estimated that during the next four years foreclosures could reach 10 million, depending on the depth of the recession.
New foreclosures in January
Missouri, statewide: 2,469
- St. Louis County: 720
- St. Louis: 575
- St. Charles County: 178
- Jefferson County: 139
Illinois, statewide: 14,444
- Cook County: 7,903
- St. Clair County: 218
- Madison County: 138
Sources: RealtyTrac, Moody's Economy.com
Jo Mannies provided some information for this story.
