Stemming foreclosures is tricky … no kidding

Excerpted from WSJ, “Finding a Way to Stem Foreclosures Proves Tricky”, Feb 11, 2009

The Obama administration provided few details about its plans to address the foreclosure crisis when laying out its economic-recovery program Tuesday, highlighting the challenges of creating a program that is fair and effective.

Nearly five million families could lose their homes between 2009 and 2011.One question facing the administration is how to win investor support for modification efforts while providing meaningful relief to borrowers.

President Barack Obama suggested that he would propose legislation to make it easier for loan-servicing companies to ease up on troubled borrowers while taking steps that might win investors’ support. Right now, he said, servicers are limited in their ability to modify mortgages that have been packaged into securities and sold to multiple investors. In addition, “the borrower is going to have to probably — if they get some assistance — agree to give up some equity once housing prices recover”.

Another challenge is determining who should get help. Those facing foreclosure aren’t just local residents hurt by job losses, but also real-estate speculators.

Another worry is moral hazard, or how to help those truly in need without encouraging others to fall behind on their payments.

Government officials are expected to create national standards for loan modifications that would be adopted by Fannie Mae and Freddie Mac. But there is little data on what types of workouts are most cost-effective. Data released in December by federal banking regulators show that more than 40% of borrowers were at least 60 days past due eight months after their loan was modified.

Forty-seven percent of loan modifications completed in November resulted in higher payments for borrowers, typically because unpaid interest and fees were added to the loan balance.

Coming up with an effective modification is complicated by the fact that many troubled borrowers also have home-equity loans or credit-card debt, auto loans or other obligations that can make it difficult to afford even a lower mortgage payment.

“You don’t want to modify a loan that you think will eventually redefault …. All that will do is delay the process and increase the cost.”

A focus for the government has been on how to determine the “net present value” of homes. Government officials think that if they can agree on a common metric for determining a home’s value, they can expedite how the loan is modified.

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