Little foreclosure relief seen from housing bill

John W. Schoen Senior producer • Profile • E-mail

After a year of debate, Congress appears close to passing a bill intended to stem the rising tide of home foreclosures and stabilize the shaky housing market.

But even if the bill wins final passage — far from a certainty — the most optimistic forecasts suggest it would help only about 400,000 of the estimated 3 million homeowners who will likely lose their homes in the next year.

Prospects for the bill have been complicated by the mortgage meltdown's latest chapter — the severe turmoil surrounding Fannie Mae and Freddie Mac, the government-sponsored companies that provide much of the capital to the mortgage market. A Bush administration plan to help prop up the two faltering enterprises has been tacked on to the housing bill, generating some backlash from congressional Republicans.

Federal Reserve Chairman Ben Bernanke warned this week that the ongoing housing crisis is having a serious ripple effect.

“The declines in home prices have contributed to the rising tide of foreclosures,” Bernanke told a congressional panel. “By adding to the stock of vacant homes for sale, these foreclosures have in turn intensified the downward pressure on home prices in some areas.”

One major hurdle to passage of the bill is a proposed $4 billion in community development grants to help agencies in hard hit areas to buy and refurbish foreclosed homes, renting them out or reselling them.

The debate over the provision has become something of a showdown. President Bush has threatened to veto the bill if it includes the community grants, while House supporters have vowed to keep it in the final bill, which is expected to come to a vote early next week.

Opponents say using tax dollars to buy foreclosed homes amounts to a bailout for lenders; proponents argue that the funds would create new jobs and help stem the slide in home price where foreclosure rates are highest.

“The real losers in this awful crisis are the residents who live next to the foreclosed property who have continued to pay their mortgages on time yet see their property values rapidly decreasing,” Ali Solis, vice president of public policy for Enterprise Community Partners, a non-profit group that helps finance affordable housing.

The centerpiece of the proposed foreclosure relief effort is $300 billion in federal loan guarantees to help homeowners refinance into mortgages with better terms. But attorneys, housing counselors and others working with strapped homeowners say the proposal falls short because it leaves the decision to modify a loan up to the lender or loan servicing company.

That means the housing bill will have “little or no impact on the number of foreclosures,” according to O. Max Gardner III, a Shelby, N.C. bankruptcy attorney who works with homeowners who are trying to modify their mortgages.

“I just don’t think the bill addresses the core problem,” he said. “You have so many servicers representing so many different interests with each (mortgage pool) to some extent having different guidelines on loan modifications.”

Despite government efforts to prod lenders to speed up the process of reworking bad loans, progress has been slow.

A survey by Moody's Investors Service released Monday found that as of March loan servicers had modified less than 10 percent of the subprime loans with interest rate resets — up from 3.5 percent in December. Some homeowners report that their modified loan came with higher monthly payments, offering little long-term relief.

The survey found that about 40 percent of the loans modified in the first half of 2007 were 90 or more days delinquent as of the end of March.

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