Housing bill offers limited foreclosure relief

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

President Bush's decision to drop his opposition to a housing bill that has been pending in Congress for nearly a year cleared the way Wednesday for House approval of a greatly expanded package intended to shore up the shaky real estate market.

But even 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. And with home prices still falling in most parts of the country, some analysts and economists say it will take at least another year before the housing market hits bottom and begins to recover.

The centerpiece of the proposed foreclosure relief effort is a package of federal loan guarantees to help strapped homeowners refinance into market-rate mortgages with better terms than the high-cost loans that are busting their household budgets. Lenders would have to agree to take a substantial loss on the existing loan.

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 individual lenders or loan servicing companies.

As a result, 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.”

The option of refinancing loans at risk of default has been available to lenders since the housing and mortgage meltdown began. Despite government efforts to prod lenders to speed up the process, progress has been slow.

A survey by Moody's Investors Service released last week 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.

Passage of the housing bill has 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. For years, Freddie and Fannie critics complained that the companies weren't carrying enough capital on their books to offset the risks behind their gigantic loan portfolios.

Together, the two government-sponsored agencies own or guarantee more than $5 trillion in mortgages — more than half as much as the entire national debt.

Until now, the government had stopped short of explicitly promising to use taxpayer funds to back Freddie and Fannie. But as investors lost confidence in the two mortgage giants, the Bush administration was forced to step in and propose a rescue plan.

The bill creates a new regulator to oversee Fannie and Freddie with expanded powers, including approval of pay packages for company executives. The bill also raises the size of mortgages the two companies can buy or guarantee to $625,000 from the current $417,000 limit —extending the pool of customers for Freddie- and Famme- backed loans in high-cost housing markets.

To spur home buying, the bill also extends tax credits of up to $7,500 for first-time homebuyers effective from April 9, 2008, to July 1, 2009.

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