As its signature foreclosure prevention program — the Home Affordable Modification Program (HAMP) — has sputtered, the Obama administration has been looking for alternate ways to prevent foreclosures. According to a report in the Wall Street Journal yesterday, the administration is pressuring Fannie Mae and Freddie Mac, which own or guarantee about half of the mortgages in the country, to participate in programs aimed at reducing loan principal for underwater homeowners (who owe more on their mortgage than their home is now worth).
One program, run by the Federal Housing Administration, provides incentives to lenders who reduce principal, but so far has been an utter flop, with just three completed loan modifications in three months. The thought behind the administration’s pressure is that principal reductions by Fannie and Freddie — which have both been extremely reluctant to write-down loans — would both help 500,000 to 1.5 million homeowners directly and maybe entice other lenders to join in (though why they would is unclear).
In any case, Rep. Spencer Bachus (R-AL) — who yesterday won the endorsement of the Republican Steering Committee to become the next chairman of the House Financial Services Committee — is having none of it:
Rep. Spencer Bachus (R., Ala.), in an interview with Washington Wire, criticized the cost to taxpayers for such write-downs, especially since propping up the two mortgage companies already has cost taxpayers about $134 billion…While the plan could help an estimated half a million people, he said, “These are a half million people who are severely behind on their mortgage, have not been able to pay and really in most cases don’t demonstrate an ability to pay going forward. You’re just going to push the ball down the road at taxpayer expense.”
Bachus, like many Republicans, is content to blame the borrower for events outside of their control. But allowing foreclosures to continue for those who, with a little help, could stay in their homes, provides significant drag on the economy, leaving neighborhoods blighted and dragging down property values for everyone.
“Letting the status quo continue is going to be much more expensive than people think,” said Kenneth Rosen, a professor of economics and real estate at the University of California, Berkeley. “We’ve got a downward spiral in housing here, and they’d better break the back of this with some shock and awe.” As FDIC Chairman Sheila Bair has said, “We see [principal reductions] as one possible way to encourage borrowers to stick with their mortgages. This could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans.”
The Congressional Budget Office estimated that only $12 billion of the $50 billion in TARP money that the administration allocated to foreclosure prevention has been spent, so there is ample room to launch new efforts at helping troubled borrowers without blowing up the government’s bottom line. While the administration’s efforts have largely flopped, Republicans have proposed nothing but leaving borrowers to the mercy of the banks.