Home-Foreclosure Rescue Is Falling Short, Critics Sayby
Editor's note: An earlier version of this story had an incorrect quote from Elizabeth Warren.
The Treasury Dept. is basking in the latest tally of homeowners getting a break through its core foreclosure-prevention program. But its data show the number of new mortgage modifications actually fell in September, and government watchdogs are raising concerns that the program is ill-suited to the problems of the housing market.
The Treasury's report on the program released Oct. 8 shows a steady upward march in the number of loan modifications, growing to 487,081 by the end of September—and, the agency said Thursday, surpassing 500,000 by Oct. 6. That is three weeks ahead of the timetable set by the Administration.
But those are cumulative figures. Mortgage servicers actually signed up fewer homeowners in September than they did in August—100,216 last month, down from 133,192 the month before. That was even below the 110,397 signed up in July.
Warning from Oversight Panel Deceleration doesn't bode well for a program that hasn't yet hit its halfway point. Treasury Secretary Tim Geithner estimates that 40% of 1.2 million people currently eligible for the program are now taking part, and Treasury officials see the drop in new sign-ups as a moderation brought about after servicers worked through a backlog of pent-up demand.
But with the housing crisis worsening, many worry the government's current efforts won't be enough. That's also the warning from the Congressional Oversight Panel, established to keep an eye on the federal response to the financial crisis, including the Administration's Making Home Affordable program.
While recognizing the program's progress, the COP report—drafted before the Treasury's latest data release—warns that even if it prevents 2 million to 2.6 million foreclosures, the program may barely dent the crisis. Indeed, with estimates that the economic crisis will force as many as 12 million homes into foreclosure, it may not prove enough even if the program leads to the 3 million to 4 million modifications that the Treasury maintains will ultimately be achieved over time—a figure the Government Accountability Office has since called unrealistic.
"It's not that we think this program needs to be put on steroids," said Elizabeth Warren, the Harvard law professor heading the oversight panel, in a Thursday evening briefing. "The question we asked is whether this is the optimally designed program to have the optimal effect."
Foreclosures Only Delayed? Specifically, the panel—with disagreement from its two Republican members—argues that the program is too tightly tailored around the problems of subprime mortgages. By lowering monthly payments to 31% of income, the program does little for the increasing numbers of homeowners who lose their jobs and can no longer make mortgage payments at all. "It increasingly appears that [Treasury's Home Affordable Modification Program] is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," the report says.
In addition, the group warned that even "permanent" loan adjustments under the Administration's program aren't permanent—they last five years, and could leave homeowners in the lurch after that. "We've raised the question about how many foreclosures it will prevent and how many it will simply delay," Warren said.
She also questioned how many of those who qualify for the program—which includes a 90-day trial period to ensure that government subsidies don't go toward homeowners destined to default even with assistance—will ultimately get even five years of benefit. (Treasury officials said more than 90% of the loans under its program are still in the trial period.) "Right now, we simply don't have enough data," Warren said.
One bright note in the panel's report is a cost-benefit analysis from Alan White, a Valparaiso University law professor. He estimated that the $50 billion program would spend $16,000 to $21,000 per borrower—counting both first and second liens—but that it was likely to be more than offset by savings to investors, taxpayers, and others. About a third of the savings would go to the investors holding the mortgages, White estimated; the rest would accrue to municipalities, neighbors of the borrowers helped by the program, and the assisted families themselves.
In a statement released Thursday night, Treasury spokeswoman Meg Reilly noted that the loan-modification program is "only one piece of the Administration's multifaceted effort" to stem the financial crisis. Citing a health-care subsidy for the unemployed and extended unemployment benefits, she said officials "continue to study further ways to help unemployed homeowners."
GAO Reports Other Shortfalls A new GAO report points to other hitches in the Administration's housing effort. It notes that, as of late September, not a single mortgage servicer had signed on to the Treasury's program for modifying second liens—loans that are widely seen as a serious obstacle to assisting many homeowners. The GAO also found that internal controls and compliance oversight was only partly in place for the housing program. It also noted the agency had yet to name a Homeownership Preservation Officer, though it had made strides in filling other positions devoted to housing issues.
In releasing the latest figures, Treasury officials stressed that the federal government has pushed interest rates down, allowing some 3 million homeowners to refinance.
"We're very pleased to have reached this goal," Housing & Urban Development Secretary Shaun Donovan told reporters Thursday. "But we obviously still have a lot more to do in terms of helping American families keep their homes."
One Treasury official told reporters the Administration's loan-modification program was "reaching borrowers who have lost their jobs" or seen their work hours cut. That's because unemployment benefits are counted as income when calculating reductions in a borrower's monthly payment.
Representative Barney Frank (D-Mass.) and some Democratic senators are examining ways to offer direct assistance to unemployed homeowners, perhaps by postponing mortgage payments temporarily or with direct financial assistance. A bill introduced on Sept. 30 by Senator Jack Reed (D-R.I.) would provide funds to states to assist unemployed homeowners at risk of foreclosure.