Central Valley

Why are mortgage rescue plans slow to materialize?

WASHINGTON -- Speaking at a high school in Mesa, Ariz., about a month after taking office, President Barack Obama launched an effort to keep as many as 9 million homeowners out of foreclosure in a major federal effort to stabilize the U.S. housing market.

What kind of impact has this plan, backed by $50 billion from the financial industry bailout fund, had on the housing crisis the past few months?

While outside analysts expect the program to ultimately make a difference, it's been slow to get up and running. The impact of the plan is likely to be less significant than the Obama administration's original projections of up to 4 million loan modifications and 5 million refinanced loans.

The program could help distressed homeowners in the Northern San Joaquin Valley. The region has been hard hit by foreclosures since the housing market declined. As the recession deepened and unemployment spiked, foreclosures continued to grow.

The housing market in the valley has shown improvement in sales volume in recent months and even a slight increase in home values in some areas. But analysts expect more people to face the loss of their homes as legislative moratoriums and other efforts to delay foreclosures expire.

In an effort to get the stabilization program moving, the government has summoned mortgage executives from 25 companies to meetings today with top staff members from the Departments of Treasury and Housing and Urban Development. Six other companies weren't invited because they just joined the program this month.

Meanwhile, government officials, lawmakers and activist groups are urging the participating companies to ramp up their efforts.

"Much more progress is needed," Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan said in a July 10 letter to the industry, arguing that participating companies should "devote substantially more resources to this program."

Here are some questions and answers about the program.

Q: How many borrowers have been helped?

A: More than 55,000 borrowers have received refinanced loans and at least 200,000 were enrolled in three-month trial loan modifications out of about 370,000 who were offered modifications by mortgage companies.

Q: What's the difference between a refinanced loan and a modification?

A: When you refinance your home loan, you sign a new contract with your lender. A loan modification involves changes to the existing contract, such as lowering the interest rate or extending the term from 30 years to 40.

Q: Why has progress on loan modifications been so sluggish?

A: The loan modification program requires major changes in the operations of companies that collect mortgage payments, known in the industry as loan servicers.

In normal times, those companies simply collect payments from the vast majority of borrowers who pay on time and try to recoup what they can from those who are delinquent.

Enrolling borrowers in the Obama administration's plan is much more like writing a new mortgage. That means training employees, reworking computer systems and spending a lot more time with each borrower.

Also, the initial assumptions behind the plan may have been overly optimistic, the Government Accountability Office said in a report last week. While the Treasury Department estimates that about 65 percent of borrowers at least two months behind on their mortgages will sign up, the rate of responses is more likely to be about 50 percent.

Q: Why has progress on the refinancing program been slow?

A: Initially, the administration's refinancing program to help borrowers who owe more than their homes are worth was limited to borrowers who owe up to 5 percent more than their home's current market value. That excluded many people in areas such as the Northern San Joaquin Valley, Southern California and Las Vegas, where prices have declined by as much as 66 percent.

More borrowers may qualify because the government expanded the program this month to borrowers who owe up to 25 percent more than the market value.

Q: Is the Obama administration planning any big changes?

A: Not yet. While some mortgage companies have been slow to get moving with loan modifications, others are faring better, said Howard Glaser, a Washington-based mortgage industry consultant and former housing official in the Clinton administration.

"The fact that some servicers are doing well means that the program can work," he said.

Q: What more can the government do to step up pressure on the industry?

A: Shame might work. The government soon will release a public report on how each company is doing. Exposing the leaders and the laggers could be a powerful incentive for the latter to perform better.

Q: What's in it for the mortgage companies?

A: Money. Under the program, the servicers will pocket up to $4,500 for each loan they modify. But they won't start to be paid until homeowners have made on-time payments for three months. The owners of mortgage securities, complex investments backed by the value of mortgages, can get paid as well, but how much will depend on what it costs the investors to modify the loan.

For borrowers who make timely payments for at least a year, the government also will pay up to $5,000 to reduce borrowers' outstanding principal balances.

Q: What are the consequences if the effort doesn't work?

A: If the program doesn't kick in reasonably well, experts warn, the recent spate of optimism about the housing market and the economy could fade as more borrowers fall into foreclosure, putting downward pressure on home prices and forcing banks to write down the value of their mortgage-backed securities.

Q: How does this effort compare to previous efforts to tackle the mortgage crisis?

A: It's doing better. For example, lawmakers spent much of last summer arguing about a refinancing effort known as the Hope for Homeowners program. It was launched by the government in the fall but has provided few homeowners with hope, proving unattractive to banks required to absorb large losses.

About 950 borrowers have applied for that program, and only one loan has been refinanced.