The $300 billion housing-rescue legislation that President Bush signed Wednesday is partly designed to pull some 400,000 homeowners out of foreclosure.
With more than 2 million foreclosures expected this year, who will be saved?
The short answer: This year, very few people.
Groups that help financially strapped homeowners are warning that the rules governing the new federal rescue may not be ready until October. Moreover, by the time the federal government gets ramped up, help may not be forthcoming until next year. That may be too late for the 1.8 million people who entered foreclosure proceedings in the first half of the year.
"The bottom line is [that] the full set of eligibility is not yet developed," says Jim Carr, chief operating officer of the National Community Reinvestment Coalition in Washington. "Once the details are fleshed out, it will take months to ramp up and train people." The idea is to help troubled borrowers who took out loans before Jan. 1, 2008. A homeowner has to be able to afford a loan worth 87 percent of the appraised value of his or her primary home. Just as important, the lending bank must agree to take a loss on the loan, which then becomes part of a federal portfolio, in essence owned by the Federal Housing Administration (FHA). The homeowner also must agree to split profits with Uncle Sam if the home rebounds in value and is sold.
"Implementation will be the biggest challenge," says Sharon Price, director of policy at the National Housing Conference, a solution-oriented nonprofit based in Washington. "For example, it's up to the lenders whether or not they want to participate."
The incentive for mortgage lenders is that they get a government guarantee on the balance of the loan.
"It limits their downside," explains Bob Litan, a senior fellow at the Brookings Institution in Washington. "If you are a bank and you think property values are only going to get worse, it's better to take a little hit now."
The Congressional Budget Office, in an analysis of the legislation, estimated it would affect about 400,000 loans over four years. Housing experts anticipate most of the applications will be in the first two years.
"Unless a lot of lenders come forward in the next year, this bill will be viewed as a failure," says Mr. Litan.
Getting the program up and running will take some time. One former HUD employee recalls it took four months this year to get the banks ready to offer a new product called FHA Secure, a program designed to help at-risk borrowers.
"Some critics say it is a Bank of America bailout," says Litan. "But I supported this bill because something is better than nothing, and if you view the housing price decline as a runaway freight train, this legislation applies some brakes."
Another incentive for banks to participate in the program might be to staunch losses. On Monday, Merrill Lynch & Co. agreed to sell $30 billion of mortgage-related securities for 22 cents on the dollar.
"It was a mix of recognizing losses that they had not owned up to, plus suffering some new losses," says Litan.
For homeowners, the rescue package might be the last chance to keep their homes – if they can qualify for the program. "Our take is that for those who do benefit, it does help," says Mr. Carr. "But it's also clear it won't have a major effect in stemming the foreclosure crisis."
The key issue for homeowners will be how much the lender agrees to write down the loan.
"That will determine the demand for the product," says Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland Inc. "If the borrower has to refinance at a still-overinflated principal amount, then the change means nothing."
Mr. Tisler says his organization, which negotiates with mortgage servicers on behalf of financially strapped homeowners, is still not seeing enough of an interest by the banks in writing down the principal amount owed. Instead, he says, many banks would rather tack arrearages onto the back of a loan.
On Wednesday, Hope Now, a private-sector alliance of mortgage services, investors, and counselors, said it completed in June 181,000 workouts of loans to prevent foreclosure. In the past year, the group reports preventing 1.9 million loans from being foreclosed. More than half of the workouts were subprime loans – that is, loans made to people with less-than-stellar credit.
Faith Schwartz, executive director of Hope Now, says some solutions do involve tacking on missed payments. But "at the end of the day," she says, "the payments are meant to be affordable."
Hope Now is monitoring 928,000 loans, mostly subprime adjustable-rate mortgages that were due to reset between January and June of this year. Of those loans, 382,000 were either refinanced or paid off. Some 57,000 loans were modified.
"Of those modified loans, 72 percent are for five years or longer," says Ms. Schwartz.
Hope Now is also finding that borrowers appear to be managing the interest-rate resets so far. As of Jan. 1, less than 1 percent of the loans that were current but due to reset have started the foreclosure process.
"It seems to be working; they are staying current," says Schwartz.
Even with all the new programs, it will be a challenge to persuade some borrowers to participate in them. In Cleveland, for example, some borrowers are inclined to just walk away from their houses, especially on distressed blocks, says Councilman Anthony Brancatelli, an expert on housing issues.
"After someone has been through a predatory loan [and] they are now facing foreclosure notices, it's difficult to say 'embrace this house,' " says Mr. Brancatelli.