The much-anticipated speech Tuesday by Treasury Secretary Timothy Geithner left at least one major issue dangling: how to address the country's burgeoning foreclosure problem.
That is a huge challenge. The Obama administration, which has pledged $50 billion to a new program, must devise a policy that helps as many homeowners as quickly as possible, yet not create any perverse financial incentives that end up costing the government more.
So far, there are no great models to follow. Various public and private programs designed to help alter mortgages to enable homeowners to stay in their homes and for lenders to keep collecting payments haven't worked. And they've been much slower at helping families than anticipated.
Hope For Homeowners?
Hope for Homeowners, the government's main program launched late last year, has become the poster child for such failure. When it started, it pledged to modify the loans for some 400,000 homeowners. The latest available data showed only 25 had been modified.
"It should be renamed No Hope for Homeowners," says John Taylor, president and chief executive of the National Community Reinvestment Coalition, an advocacy group for homeowners.
Taylor is among those who harbor strong opinions about how the administration needs to structure its program. Many troubled mortgages aren't getting resolved, he said, because of the way the loans are structured. Mortgages are often packaged into securities, then sold to hundreds or thousands of investors. Although the value of those investments has declined along with housing prices, many investors aren't willing to take a loss — and are hamstringing the mortgage modification process, Taylor says.
Purchasing Bad Mortgages
He says the only way the government can solve mortgage problems en masse is if it buys lots of bad mortgages at current market values — 25 percent or 30 percent less than their original value in most cases. Then the government, through Fannie Mae and Freddie Mac, which it controls, can modify all those loans and pass the discount along to homeowners.
What if investors refuse to sell at a discount? Taylor and several other economists have suggested the government can take over the mortgages by legal force.
Howell Jackson, a law professor at Harvard University, says the government could use eminent domain — the same tool it uses to buy properties that stand in the way of a railroad, for example.
"They can use the taking power to take any kind of property if there's a public purpose, and this is an area where there's clearly a public purpose," he says.
That is a radical idea that, even its proponents admit, members of Congress and the administration haven't backed — at least publicly.
The Role Of Servicers
And there are others who say the key problem isn't the investors, but the middleman companies that manage the loans on behalf of investors. Since so many mortgages are held by multiple investors, servicers play a key role in billing and collecting the monthly bills from homeowners. But since servicers don't actually own the loans, they often are afraid to modify the terms of mortgages out of fear the investors they represent will sue them for doing so.
Therein lies the main problem, says Columbia University law professor Edward Morrison. Congress is working on legislation that would grant immunity to servicers who amend home loans to prevent foreclosure, he says.
In addition, the administration's program will have to create new financial incentives for servicers to modify loans. Currently, modifying a loan can cost a servicer an average of $750 to $1,000 to collect all the paperwork necessary, he says. But if the government offers servicers a cut of each monthly payment on a modified mortgage, servicers will have an incentive to modify more loans, and will also have an ongoing incentive to make sure the loan gets paid, he says.
Jackson disagrees with Morrison's plan. He says making the government's program more lucrative to servicers will create the side effect of effectively freezing all other bank efforts to modify loans, which don't offer such payments.
And that, Jackson says, illustrates one of the underlying problems in designing a foreclosure prevention plan: "We're really just trying to figure out who bears the loss. Do we want the government to bear it all, or do we want some of it to be pushed onto investors?"
No matter how that cookie crumbles, the parties are likely to be unhappy. And then the challenge is making sure all the parties cooperate to make the program work anyway.