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Mortgage relief plan: Can it spark housing rebound?

Mortgage relief aimed at trying to boost lagging housing sector. Most of the $25 billion mortgage relief will go to homeowners struggling to pay their mortgages.

By Jim Puzzanghera and Alejandro LazoLos Angeles Times/MCT / February 10, 2012

A foreclosure sale sign sits in front of a house in Miami Beach, Fla., in this file photo taken in 2009. The long-awaited settlement provides mortgage relief to borrowers hurt by the US housing crash. Checks of up to $2,000 each are expected to reach 750,000 households who lost homes through the foreclosure process between 2008 and 2011.

Carlos Barria/Reuters/File

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WASHINGTON

The landmark $25 billion settlement between major banks and state and federal governments is aimed at doing more than just helping people who lost their homes through improper foreclosures.

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It's an attempt to fix the biggest weak spot in the nation's economy. Although analysts are unsure the cure will take, the outcome could help determine whether voters give President Barack Obama a second turn in office next fall.

By most measures, the economy is improving: Unemployment is down, consumer spending is up, and financial markets have regained the ground they lost in the 2008-09 financial crisis.

The housing market is the last holdout, with home prices nationwide down nearly 34 percent from their peak in 2006, according to real estate data firm CoreLogic. The average home is now worth what it was in 2003.

Although Thursday's settlement originated more than a year ago as an effort to discipline lenders for improper foreclosures, it has evolved into a housing relief package.

Most of the money _ $17 billion _ is earmarked for people who are struggling to make their payments, chiefly by reducing the amount of principal on their mortgages. An additional $3 billion will be spent by the banks to refinance mortgages of homeowners who are current on their payments but owe more than their homes are worth.

"This isn't just about punishing banks for their irresponsible behavior," said Housing and Urban Development Secretary Shaun Donovan. "It's also about requiring them to help the people they harmed by funding efforts to help homeowners stay in their homes."

For Obama, whose administration pushed hard for a deal, an upturn in the housing market would be a boost to his re-election hopes this fall. The banks receive incentives to provide relief within 12 months.

"This isn't just good for these families," Obama said of struggling homeowners. "It's good for their neighborhoods, it's good for their communities and it's good for our economy."

There's broad, bipartisan agreement on that. After hectic last-minute negotiations this week, 49 state attorneys general _ 25 Democrats and 24 Republicans _ signed on to the long-sought settlement.

Only Oklahoma Attorney General Scott Pruitt, a Republican who reached a separate, more narrow settlement, did not join the broader deal.

Julio Zapata, 44, of Diamond Bar, Calif., is one of the struggling homeowners the agreement is supposed to help. But Zapata, a medical equipment technician, is skeptical that the banks will live up to their promises.

Zapata said he had trouble making his payments, and after a two-year battle, he recently persuaded his lender to alter the terms of his loan. He won a small reduction in payments but is still not sure he can keep the house without another modification.

"It was a horrific process _ draining, frustrating," he said. "It just took a lot out of me. And at the end of the tunnel, I'm still not in a better position than before."

Housing experts say the settlement probably will lead the banks to pick up the pace of foreclosures, which they have kept in low gear because of the pending settlement.

That will produce pain for homeowners and could push prices down further _ at least temporarily. But clearing up the foreclosure backlog created by federal and state investigations should help heal the real estate market.

"The servicers will start working through those big backlogs of foreclosed homes ... and that will put downward pressure on home prices," said Celia Chen, a housing economist at Moody's Analytics.

Stuart Gabriel, director of UCLA's Ziman Center for Real Estate, said the housing markets in the state's hardest-hit areas largely have hit bottom already.

"This will have some modest effect on the healing of those markets," he said.

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