Obama’s Anti-Foreclosure Plan is Not Working

Jul 6th, 2009 @ 4:51 PM by Alden Smith

Our country is now four months into the Obama anti-foreclosure effort.  According to the White House, their “guesstimate” is that over 50,000 loans modified were at risk.  According to an article in the New York Times, no real precise data is available because there is not a tracking system in place.  A treasury official told The Times’ Peter Goodman that they are on track to modify 20,000 loans a week by the end of August.  To many, this is too little, too late.  Moody’s Economy.com is predicting that approximately 7 million homes will fall into foreclosure this year and 2010.  Moody’s also predicts that nearly 4.5 million of these homes will end up in distress sales.  If this happens we will see a further drop in home prices, home equity and household wealth.  This is not a way to end a recession.

According to The Times, banks are saying that they are working hard to fill the demand.  As far back as May 2007, banks and loan servicers promised Washington that they would help distressed borrowers.  Today, we only see a further worsening situation.

It stands to reason that the banks are in no hurry to buy into the anti-foreclosure program.  For one thing, the banks that could really make a difference have received their fair share of bailout money, and really have no reason to stick their neck out again.  Even though the Obama plan makes it a win-win situation for banks and lenders, the banks appear to be more interested in the incentives, and whether or not they will meet their approval.

We all know that a foreclosure in any scenario causes economic weakness.  Foreclosures drive down home values, blight neighborhoods and decrease the tax base of any city.

In an attempt to placate everyone, President Obama loosened his rules on the mortgage refinancing program.  Borrowers current on their payments but with little equity may be able to get a lower interest rate.  This does little for the truly distressed homeowner, who is facing foreclosure and financial ruin. A much better idea would be to reduce principals on loans so that the homeowner would not be under water.  It not only restores equity, but gives the homeowner more incentive to stay in the home.  Banks are not a big fan of principal reduction.  It doesn’t look so good on their balance sheets.

It is obvious that bankers, the administration, homeowners and everyone in the mortgage chain needs to take a really good look at what is going on.  In a conversation today with a banker from Flagstar, I heard much about the frustration that even bankers are facing with such simple plans as an FHA mortgage.  Previously, the banker told me, they were given at least 30 days notice before changes in rules.  Now, this is happening overnight.  Loans have been made and have had to be canceled because of a rule change in the middle of putting together the paperwork.  The banker has been in the business for 23 years, and told me that she has had to learn the business all over again, because of the new challenges that the bank faces. FHA has made rule changes, making it even harder for people to secure an FHA loan.  To anyone’s thinking, this is just not a good business practice.  I firmly believe that there is a long way for this country to go before the mortgage disaster is straightened out.  In the meantime, we will see more foreclosures, more families put into financial ruin and rising unemployment.