A foreclosure sign in Stockton, Calif.
It was on a sunny day in the White House Rose Garden that President George W. Bush announced his plan to enable as many as 700,000 American families to avoid foreclosure amid a growing mortgage crisis. "I've made this a top priority to help our homeowners navigate these financial challenges," he said, "so that as many families as possible can stay in their homes." That was in the summer of 2007.
More than a year — and a half a dozen rescue plans — later, little progress has been made in turning the tide. The nation's foreclosure rate has risen every month since the middle of 2007, according to FirstAmerican LoanPerformance, which tracks the mortgage market. As of August, nearly 3% of all home loans were in foreclosure, and a further 6% were more than 60 days late on their mortgage payments. But the picture is far grimmer among subprime borrowers, those with less-than-perfect credit: As of July, nearly one-third of those borrowers were more than 60 days late on their mortgages. All told, some 6.5 million families will lose their homes to foreclosure in the next few years, according to the projections of financial firm Credit Suisse.
Even so, the troubled U.S. homeowner is not among the priorities of those in Washington who are dishing out rescue funds. The Treasury Department plans to spend $250 billion of the $700 billion rescue package approved by Congress earlier this month on capitalizing banks. To the back burner went Treasury's original plan to buy up distressed mortgage bonds, and along with it the idea that such purchases could be used to pressure banks into giving better loan deals to homeowners facing foreclosure.
"We are all for a strong financial system," says Ellen Schloemer, director of research at the Center for Responsible Lending. "But borrowers need to be helped too, and they have in large measure been left out of the rescue effort."
Saving homeowners is far from easy. The original Bush plan, FHASecure, which involved the government refinancing people into lower-interest loans, has thus far helped only about 387,632 borrowers. A subsequent plan to identify borrowers in trouble and modify their loans has been more successful. As of October, the Hope Now Alliance says it has helped 2.3 million borrowers stay in their homes. But only a third of those homeowners actually got loan modifications. The rest got some kind of short-term fix from their lender, such as forgoing a missed payment or giving a few months' reprieve in making payments — and consumer advocates warn that such measures will land those borrowers back in trouble when their regular mortgage terms resume. What's more, the Center for Responsible Lending estimates that nearly half those borrowers who got modifications saw their monthly payments go up, not down.
In July, Congress allocated $300 billion for a new plan, Hope for Homeowners, to help borrowers stay in their houses. It went into effect this month, but analysts warn that it won't stop the rise in foreclosures. An April report from the Congressional Budget Office (CBO) estimated that banks would refinance only about 400,000 home loans, possibly fewer. And in recent congressional testimony, officials from JPMorgan Chase said only about $2.5 billion of its home loans (some 14,000 borrowers) of the $845 billion in home loans it services would qualify for the program. Worse, warns the CBO, nearly one-third of borrowers who qualify for the new plan will end up redefaulting on their mortgages anyway. "The steps we have taken so far don't nearly address the scope of the problem," says Schloemer.
One reason it has proved so hard to help homeowners is that today's mortgages are no longer simply held by a local bank; they have been sold to Wall Street, where they were cut up and repackaged into thousands of bonds sold to investors. The current global credit crisis originates from the moment when subprime borrowers starting having trouble making their mortgage payments, which had been funneled into interest payments to bond holders.
And the fractured ownership of those mortgages vastly complicates efforts to help homeowners. People with knowledge of the mortgage business believe that proposals to buy up individual home loans and refinance them, as proposed by Senator John McCain, seem impractical at best. "You can't get whole loans out of trusts," says Joshua Rosner, an analyst at Graham-Fisher. "To do so, you would need the approval of all the bond holders, which can be thousands of investors spread around the world." Worse, Rosner says, for most mortgage trusts, the government has no data or records that would identify those investors.
Another major problem with proposals to buy up bad mortgages is to fix a value for them in a market where the price of houses is falling — buying them at face value could cost more than $1 trillion. And some observers believe that bailouts of individual homeowners will create an incentive for many more Americans to relieve pressure on their household budgets by stopping their own mortgage payments in order to get government help.
Moreover, while the subprime mortgage crisis may have initiated the current global credit meltdown, it has been eclipsed by the credit crunch it created. The $11 trillion mortgage market may be small potatoes compared with the problems in the $60 trillion market for credit default swaps. "The systematic issues have come to dominate the discussion because it is not about who is behind on their mortgage anymore," says Ann Rutledge, co-founder of R&R Consulting, which helps investment firms value complex mortgage securities. "What we are worried about is the viability of our financial system."
Not all is lost for homeowners, however. A number of economists have recently proposed new plans to stop foreclosures, seeking mechanisms to buy up and refinance individual home loans. Last week, Congress began discussing a new $150 billion stimulus plan focused on helping individual households. "I think the focus is shifting," says Gene Sperling, a former economics advisor to President Clinton who now advises Senator Barack Obama. "Pretty soon, I think we are going to see measures that are more targeted toward homeowners than we have seen up to now."