Next week, Treasury Secretary Timothy Geithner will outline his financial rescue plan, which is expected to include foreclosure assistance measures.
Last year, more than 2 million homes entered into foreclosure. Two million homes in a market where total home sales are running at fewer than 5 million a year. To ensure that this issue is addressed responsibly, the Obama administration should adhere to certain principles.
*First, support what is working. Mortgage interest rates are low, in part, because of federal support for Fannie Mae and Freddie Mac, as well as federal mortgage insurance programs. The Federal Housing Administration, under the U.S. Department of Housing and Urban Development, insured more than 500,000 mortgage refinancings last year. Evidence indicates many of these borrowers left high-cost, subprime loans for fixed-rate, 30-year government-insured loans — loans they can afford. The FHA can be expanded at little or no taxpayer cost because lending is done the old-fashioned way — full credit analysis, down-payment requirement and minimal fees that are paid by the borrowers to protect taxpayers.
The administration should invest in modernizing FHA infrastructure to ensure it can handle its expanded volume and provide the oversight demanded by its $500 billion insurance portfolio. Congress has consistently underfunded HUD’s request to upgrade antiquated technology.
That has to change.
*Second, don’t pay off private lenders to do things they should have been doing on their own with taxpayer dollars. Lenders often lose 30 to 50 percent of the mortgage value in a foreclosure, so there is significant incentive to modify loans and help troubled borrowers avoid foreclosure. Yet, certain proposals would have the government provide lenders with taxpayer-funded incentives to modify loans. These are the same financial institutions that are receiving billions in federal dollars through the Troubled Asset Relief Program. While many financial institutions have made commendable progress in assisting troubled borrowers, there continue to be impediments to progress. One is the ongoing difficulty in getting servicers of mortgages (who interact with the borrower) and passive investors (the ultimate lenders) to agree on measures to address the issue. Another is providing sufficient staff to handle the massive volume of calls from borrowers with unaffordable mortgages.
*Third, design fixes in consultation with the financial institutions that will implement them. Too often programs are introduced with little chance of success because flaws render the programs useless. The result is borrowers who need help are left unassisted.
*Fourth, understand that excessive mortgage debt is symptomatic of a broader issue. Lenders have reported that techniques to reduce the cost of a mortgage below a percentage of a borrower’s income are often fruitless because the cost of other debt continues to be a burden. A recent report by the Office of Comptroller of the Currency showed that more than half of borrowers with modified loans redefaulted after just six months. Ignoring this important point will result in wasted effort and cost.
*Finally, admit that not everyone can or should be helped. Delinquent borrowers include speculators, people who walk away from their homes and, sadly, some who are just not prepared for the responsibilities of homeownership. We are in this mess because of bad decisions and bad behaviors. We have learned a tremendous amount over the last year about the factors that are leading to rising foreclosures. Any solutions we advance must be subjected to a rigorous assessment to ensure they will hit the mark. Doing so requires leveraging successful programs in place, expecting the private sector to carry the weight and understanding the challenges facing borrowers who need help.
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Steven C. Preston was secretary of Housing and Urban Development in the Bush administration.
