President Obama on Friday proposed to sweeten a deal from Washington to entice banks to modify payments, lower loan principal, and expand eligibility in order to help more of the 11 million American families sinking under their mortgages.
The proposed modifications would move the Home Affordable Mortgage Program's sunset date from the end of 2012 to the end of 2013, triple incentives for banks to participate by paying up to 63 cents on the dollar to forgive portions of borrowers' debt, and force banks to consider other debts, including medical bills, in their approval process.
Part of a series of housing relief measures expected as Obama kicks off his 2012 reelection campaign, the proposed expansion of HAMP has been described by some housing experts as too little, too late, especially given that the program has already fallen far short of its goal of helping 4 million homeowners sinking under debt.
Moreover, Obama's gambit to include mortgage servicers Fannie Mae and Freddie Mac, which hold nearly half of all US mortgages and have received $150 billion in bailout cash since 2008, have raised concerns from their independent government regulator that forcing the lenders to forgive principal could cost taxpayers another $100 billion.
The regulator, Edward DeMarco, told Congress last week that he doubted potentially costly principal modification – in essence, using Treasury funds to pay down the principal of an individual's mortgage – would be more effective than loan forbearance, which means allowing homeowners to lower or postpone payments in order to catch up on their debt. Mr. DeMarco is currently reviewing Obama's proposal.
Housing and Urban Development secretary Shaun Donovan disagreed in a conference call with reporters. "It's not enough to increase access,” he said. “We also have to increase impact. We have to rebuild equity. Lowering payments isn't enough."
The issue of taxpayers bailing out fellow homeowners is a heated one. A 2009 rant by an MSNBC reporter about mortgage bailouts helped spark the conservative tea party movement.
“This is a hoot,” Thomas Lawler, an economist and former Fannie Mae executive, told Bloomberg News. “The government will pay Fannie and Freddie, who are effectively owned by the government, to reduce the principal on certain loans?”
But it's also a critical issue for Obama, beyond the debate about the government's responsibility in helping struggling homeowners. Key election battleground states, including Florida and California, are awash in foreclosures and pinched homeowners, critical anchors on the economy.
The big question is whether the expanded incentives will actually spur banks to action.
Intended to reach 4 million homeowners, HAMP has only successfully helped 1 million, reducing monthly payments by an average of $500. Last week, Bank of America and Chase were both in danger of losing tens of millions of payments from Washington due to lackluster participation in HAMP. For many homeowners, too, the modification process has proved onerous, frustrating, and, at the end of the day, too much of a hassle for too little payout.
"I'm not that excited about incentives," Ira Rheingold, executive director of the National Association of Consumer Advocates, told the Huffington Post. "The fact is, the banks have done a terrible job complying with the program. Today, we're seeing the same problems as three years ago – they lose people's documents, they wrongly push people into foreclosure. And the Treasury Department hasn't held them accountable for their failures. So even if you expand the incentives, until you make the banks comply, we're going to see these problems."
Congressional Republicans tried to kill the program last year, but their effort died in the Democrat-controlled Senate. The administration, meanwhile, insists that HAMP has been effective, and expanding it over the next two years will be critical not just to struggling homeowners, but to bolster economic recovery.
“Ensuring that Americans who are struggling to make ends meet have lower payments, those out of work have more time (up to 12 months) to catch up on missed payments, and helping those who are struggling with secondary debt, like second liens, medical bills and credit cards by lifting the debt to income ratio, all the while helping to keep more Americans in their homes is an important step toward doing that,” HUD spokesman Derrick Plummer wrote to the Huffington Post.