Foreclosure Plan Ill-Suited for Changing Crisis, Report Says By Nick Timiraos and Jessica Holzer Wall Street Journal 10-10-09

Foreclosure Plan Ill-Suited for Changing Crisis, Report Says
By Nick Timiraos and Jessica Holzer
The Wall Street Journal
October 10, 2009

Despite offering a rising number of trial loan modifications, the Obama administration's housing-rescue efforts are increasingly ill-suited to address the changing nature of the foreclosure crisis, according to a report released Friday by a watchdog panel.

The report, from the bipartisan Congressional Oversight Panel created to oversee the government's $700 billion financial bailout, concluded that the most ambitious effort to prevent foreclosures to date isn't set up to help the current drivers of foreclosures -- borrowers with good credit who have lost their jobs and those with complex mortgages.

Under the Home Affordable Modification Program, or HAMP, eligible borrowers who are behind on their mortgage payments or at imminent risk of default can have their monthly payments reduced. A companion program allows eligible borrowers to refinance their mortgage if they have little or no equity in their home. But modifying loans for unemployed borrowers who are unable to afford even reduced payments could lead to higher redefault rates.

The report was released one day after the Obama administration said it had met a key benchmark for the housing-rescue program by offering trial loan modifications to 500,000 homeowners.

According to the Congressional Oversight Panel's report, "it increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now."

Even trial modifications might not lead to a permanent fix, and the homeowners who do receive a permanent modification will see payments rise after five years. "The result for many homeowners could be that foreclosure is delayed, not avoided," the report said.

Foreclosure efforts so far, including HAMP, were designed to modify subprime adjustable-rate mortgages and other risky loans that were becoming delinquent as interest rates adjusted, making loans unaffordable. By reducing the interest rate or extending the loan over a longer term, more borrowers might be able to make monthly payments.

The current wave of trouble is being driven by borrowers with good credit who are losing their jobs and can't afford to make any mortgage payments or who have complex mortgages that can't be easily modified without writing down the loan balance, which mortgage companies have been reluctant to do.

The oversight panel, which approved the report on a 3-2 vote, called for the administration to expand the scope of the effort to address this new wave of troubled borrowers.

A Treasury Department spokeswoman defended the progress of the effort and said, "We continue to study further ways to help unemployed homeowners."

Senate Democrats last month introduced a bill that would set aside federal funds for states to offer mortgage assistance to unemployed borrowers, and policy makers are also considering proposals that would allow lenders to lower payments beyond the requirements of the HAMP program for unemployed homeowners.

Unemployment-driven foreclosures are a "much more difficult problem, and probably outside the scope of a loan-modification plan," said Mark Zandi, chief economist of Moody's Economy.com.

The vast majority of modifications haven't included writing down loan balances, which some analysts believe would facilitate more successful modifications. "If you get into early next year and things aren't going well...then the odds are going to rise significantly that they'll try to do something that includes principal write-downs," Mr. Zandi said.