Federal funding for a California plan that helps borrowers facing foreclosure has snowballed to $2 billion, enough to potentially help more than 100,000 homeowners.
But the program lacks formal agreements with the nation’s largest banks and investors, and their cooperation is needed to make the proposed effort broadly successful.
Out of the three major mortgage servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — only Bank of America has told the state that it will participate in a central part of its Keep Your Home program that would reduce the principal balance of certain troubled mortgages, and even BofA has yet to sign an agreement. Fannie Mae and Freddie Mac have declined to participate in the principal reduction part of the plan.
The Keep Your Home program, which uses federal funds reserved for the 2008 rescue of the financial system, is intended for low- and moderate-income people who own only one property. To qualify in Los Angeles County, a family of four couldn’t earn more than $75,600. The maximum benefit for any household participating in the program is $50,000.
The biggest part of the plan gives $875 million in temporary financial help to homeowners who have seen their paychecks cut or have lost their jobs. The program would provide as much as $3,000 a month for six months to cover home payments, including principal, interest, insurance and homeowner association dues.
Another piece would provide as much as $15,000 to help homeowners get current on their mortgages, and another would provide assistance to move for those people who can’t afford to remain in their homes. Most of the big banks and Fannie and Freddie have signaled that they’re willing to participate with these parts of the plan.
But the most controversial part of the program, and the one most difficult for banks and investors to sign on to, dedicates $790 million to principal reduction. This would write down the value of an estimated 25,135 “underwater” mortgages, which are loans in which homeowners owe more on their properties than what they are worth.
The California plan — as well as programs created by Nevada and Arizona — would pay lenders $1 for every dollar of mortgage debt forgiven. Experts say reducing principal on such underwater loans would go far to reducing foreclosures in the three states because home values have fallen so steeply that homeowners are tempted to walk away from their obligations.
But the financial industry has been reluctant to participate in government-administered programs that would require them to reduce the amount that borrowers owe them.
“If you can’t do the principal write-down, you are limited in what you can do,” said Dan Immergluck, an associate professor at the Georgia Institute of Technology, who studied the different state plans developed with the federal bailout money.
“It is one thing for them to agree not to write down principal when they are being asked to foot the whole bill,” he said, “but when the states are agreeing to match this 50-50, it seems rather ridiculous of the servicers and the investors not to agree to this.”
Diane Richardson, director of legislation for the state’s housing finance agency, which created the California plan, said she expects other lenders to follow Bank of America’s lead once the program is underway.
“Once the program gets going, and other lenders see how successful it is, I think others will come aboard,” she said. The Keep Your Home program was slated to begin Nov. 1, but the launch was pushed back until early next year because the effort grew in complexity and size from when it was announced in February.
Originally, five states in which home values had dropped more than 20% since 2006 were selected to receive $1.5 billion from the Treasury Department’s Troubled Asset Relief Program. The program grew to cover states with high unemployment, which included California, and more federal money was added. California was initially slated to receive $700 million when the Treasury approved the state’s plan in July. Then even more money was added, resulting in a $7.6-billion program involving 18 states and the District of Columbia.
California, which accounts for 21% of the nation’s foreclosure activity, is the largest recipient of the bailout money. Homeowners in the Golden State also remain deeply underwater, according to recent data. In California, 27.9% of homeowners who owned single-family residences were underwater at the end of the third quarter, according to data released Wednesday by real estate information site Zillow.com. In Los Angeles County, 17.4% of borrowers owed more on their mortgages than what their homes were worth.
Even as the state struggles to get big lenders to sign on, the program has provoked complaints that it’s a giveaway to the banks. Critics say property values have fallen so steeply that much troubled mortgage debt is not worth 50 cents on the dollar. Foreclosures on these homes are so costly that the banks will come out ahead financially by writing down loan balances to keep borrowers in the homes, they contend.
“I don’t think we should have to be paying the lenders,” said Prentiss Cox, a professor at the University of Minnesota Law School Clinic. “We have already paid them in the form of the bailout, and it seems to me what we need is enforced loan modification, because that is in everyone’s interest.”
Critics also are unhappy that homeowners who refinanced their homes to take cash out of their properties will not be allowed to participate in the program. That will exclude many African American and Latino borrowers in low-income communities who were hustled into loans they did not understand or could not afford, said Yvonne Mariajimenez, deputy director of Neighborhood Legal Services of Los Angeles County.
These borrowers were “enticed by predatory lenders to refinance and pull out equity to pay medical debt, fix their houses and the like,” Mariajimenez said. “A disproportionate number were people of color that live in minority communities.”
Getting banks to write down principal has proved difficult through government programs, though some lenders have done it through their own proprietary initiatives. The federal government’s loan modification program, which is also funded by money from TARP, has always allowed loan servicers to forgive principal on troubled mortgages, but has never required them to do so.
Proponents of forgiving principal say this is a serious flaw. They contend that debt forgiveness is the only workable way to address the problem created by underwater loans.