Borrowers, don’t hold your breath for a bailout.
As mortgage delinquencies soar, many consumer advocates and political leaders are calling on government to help what may ultimately be millions of homeowners facing foreclosure.
But the modest federal and state aid proposals advanced so far suggest that most people struggling with onerous loan payments are unlikely to get government assistance.
The Bush administration has ruled out a blanket program to help homeowners stave off foreclosure, reasoning that it’s “not an appropriate role for the federal government,” White House spokesman Tony Fratto said.
And at the state level, “there is only a limited amount we can do for people who are affected right now,” said Assemblyman Ted Lieu (D-Torrance), chairman of the Assembly Banking Committee.
By one estimate, as many as 460,000 people in California -- and 2.4 million nationwide -- could lose their homes because they are unable to make payments on high-cost sub-prime loans or to refinance them to more favorable terms.
The threat of a foreclosure wave, and government’s limited ability or willingness to respond, could put added pressure on lenders to renegotiate loans that might otherwise end in failure.
Some of the country’s largest mortgage lenders -- including Countrywide Financial Corp. and Wells Fargo & Co. -- met with Lieu this week to discuss a private effort to keep at least some foundering California borrowers in their homes, participants in the meeting said Thursday.
“We discussed a potential billion-dollar, privately financed bailout to prevent foreclosures,” said Robert Gnaizda of the Greenlining Institute, a fair-lending advocate. He said the plan would provide relief to a select group, including the elderly and families of modest means with minor children.
No commitments were made, however. A Wells Fargo spokeswoman said the bank had previously discussed the possibility of a private assistance fund with Gnaizda, but had heard too few details to be able to say whether such a plan might work. A Countrywide spokesman declined to comment.
Sub-prime loans, often with adjustable rates, made homeownership possible for millions of Americans whose credit ratings or income levels made them ineligible for cheaper prime loans. But many of these borrowers now find they can’t make their escalating payments, leading to a surge in defaults and foreclosures.
Pushing for help
In Washington, Democratic Sens. Hillary Rodham Clinton of New York, Christopher J. Dodd of Connecticut and Barack Obama of Illinois -- all of whom are presidential candidates -- are among those demanding government action.
“We cannot sit on the sidelines while increasing numbers of Americans lose their homes,” Obama said in a recent letter to Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke.
But none of the three Democrats has offered more than general ideas for aiding borrowers, and none has called for a massive federal assistance program.
“Dodd has been extremely clear that he is not talking about any kind of bailout,” a spokesman for the senator said.
One problem with even suggesting a broad-based rescue plan for homeowners who are underwater is that any bailout of borrowers also would be viewed as a bailout of their lenders -- potentially including some lenders that allegedly preyed on home buyers during the housing boom.
The risk lenders now face is that they may have to foreclose on many homes and sell them for much less than the amounts loaned -- and eat the difference.
That threat is expected to give lenders an incentive to work with borrowers to restructure loans, perhaps temporarily freezing payments.
By contrast, using tax dollars to keep people from losing their homes would be “socializing” lenders’ losses, meaning society as a whole would be footing part of the bill, said Paul Kasriel, an economist at Northern Trust Co. in Chicago.
What’s more, because many loans are bundled and sold to investors worldwide via mortgage-backed bonds, the ultimate beneficiary of a government effort to keep a loan whole may be a foreign central bank or other big investor.
“When the dust settles, who are you bailing out?” asked Nick Retsinas, director of housing studies at Harvard University in Cambridge, Mass.
Nonetheless, the Bush administration has supported giving the Federal Housing Administration, created during the Depression, the ability to insure a larger number of new loans. That could provide a way for some people to refinance high-cost mortgages and keep their homes.
With FHA insurance, borrowers also can qualify for financial help if they fall behind on their payments. The agency says its loan-mitigation program helped 75,000 families stay in their homes last year.
A $2,800 lifeline
Paulette Driscal of Maple Heights, Ohio, was one beneficiary of the FHA program.
Driscal, who is 53 and on disability after a bout with cancer several years ago, says she fell behind on her $654-a-month mortgage payments last year. Her lender put her in touch with a loan-counseling service which, in turn, tapped an FHA program that provided a long-term “catch-up” loan for $2,800 to bring her up to date.
As part of the loan workout, Driscal said, she had to agree to go over her financial affairs and learn better ways to manage her money.
The loan-mitigation representative, she said, “taught me how to get on a budget and stay on it.”
Driscal expressed confidence that she could make the payments due on her $60,000 loan from now on. “I worked hard for my home and I didn’t want to lose it,” she said.
The House passed a measure last year to expand the FHA’s scope, but the bill died in the Senate. It was reintroduced Thursday in the House.
Even if Congress gives the FHA greater powers, however, many homeowners who bought homes with low “teaser rate” adjustable mortgages may simply not qualify for FHA loans if they have no prospect of earning enough to afford a market-rate mortgage.
That problem also is hindering states that are trying to do what they can to help struggling borrowers.
Ohio, which led the nation in home foreclosures late last year, is among a growing number of states hoping to provide public funding to refinance troubled mortgages. The state expects to raise $100 million through a bond sale next month to refinance about 1,000 loans.
That will help just a relative handful of the people facing foreclosure, acknowledged Doug Garver, executive director of the Ohio Housing Finance Agency.
“And there are folks who are in too deep, who won’t meet our underwriting standards,” he said.
Still, the prospect of a continuing wave of foreclosures devastating some Ohio neighborhoods makes it worthwhile for the state to try to save some borrowers, Garver said.
Borrowers must have their homes appraised as part of the qualification process. If a home is worth less than the loan amount, Garver said, “The existing lender has a business decision to make: Are they willing to take a haircut?” to get the loan off their books.
Yet some experts said any government effort that saved a borrower from foreclosure would, by extension, be saving a lender as well.
“As a basic point, it’s hard to do one without the other,” said Alex Pollock, a resident fellow at the American Enterprise Institute in Washington.