Why Aren’t Foreclosure Rescue Policies Working?
By Nick Timiraos
The Wall Street Journal
September 9, 2009
Government officials and banking industry representatives will testify before a congressional panel that examines the progress, or lack thereof, on the Obama administration’s housing-rescue policies Wednesday morning. While some economists and housing analysts have lauded the administration’s effort as ambitious, the administration may have itself to blame, in part, for negative headlines suggesting that the program hasn’t lived up to its hype.
That’s because during the roll-out, the administration said that millions of Americans might benefit from the program, which allows homeowners who don’t have much equity left in their homes to refinance. So far, around 60,000 borrowers have refinanced and another 300,000 or so borrowers have been able to enter into trial loan modifications.
But the economy has also trampled on the plan in some unforeseen ways. Prime borrowers are beginning to default at a faster pace than subprime borrowers—a sign that rising unemployment and not unaffordable mortgage payments on exotic loans. And that may have more to do with defaults. Indeed, jobs and home prices may help determine the ultimate success rate of these programs, as Tracey Seslen, a clinical finance professor at USC’s Marshall School of Business, notes on this blog run by the university’s Lusk Center for Real Estate.
As for federal efforts, Ms. Seslen argues that reducing borrowers’ loan principal, rather than lowering the borrowers’ interest rate to achieve a lower monthly loan payment, ought to be “among the first remedies considered.”
Currently, both plans call for interest rate reductions and extensions of the amortization period of the delinquent loan. But with these two remedies, the underlying problem of making payments still exists—it is just pushed a small distance into the future. When the new “teaser” rate period expires, the borrower will often go delinquent again. If borrowers are currently underwater and don’t expect to ever see positive equity, there is a lower incentive to continue paying.
The USC prof nods to the moral hazard element at play—banks may be unwilling to head down this road, in part, because it may encourage others to default in an attempt to win better concessions.
Still, these are points that are likely to come up during this morning’s congressional hearing as lenders and government officials defend their performance so far.
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