Treasury Secretary Henry Paulson says he is encouraged by new data suggesting that mortgage lenders are increasing efforts to help troubled homeowners. The Hope Now Alliance, a group of lenders, including such giants as Countrywide and Citigroup, reported Monday that since July they have provided help to more than 1 million borrowers. The Alliance was organized by the administration to help struggling homeowners.
Hope Now officials touted the new data, saying that it showed three times as many homeowners are getting loan adjustments as are being forced to sell their homes in foreclosure. But critics say the voluntary plan isn't doing enough.
Bruce Marks of the Neighborhood Assistance Corporation of America, or NACA, says most of these loan adjustments are just band-aids. In fact, he says, about three-quarters of the adjustments make no change in the interest rate, amount or length of the loan. In the worst cases, Marks says, they just allow delinquent borrowers time to catch up, and could actually raise monthly payments.
"The vast majority of those 'solutions' is no real solution," he says. "The inevitable result is going to be foreclosure, because they're not changing the underlying mortgage."
The mortgage is "structured to fail," he says, "It's unaffordable."
Marks suggests a different approach: reducing the interest rate on the loans to make them affordable. His organization, which works with low income borrowers, is doing just that under an agreement it negotiated with Countrywide. NACA is refinancing loans and cutting rates by as much as 5 percent so borrowers can stay in their homes, Marks says.
NACA's approach is just one of a number of alternatives being put forward by skeptics who don't think the administration's voluntary Hope Now Alliance is an adequate answer to the mortgage crisis. Among those skeptics is Mark Zandi.
"I think we're getting to the point where we might have to become much bolder in what we do," Zandi says.
Though he is a private economist, Zandi has been shopping a plan around Washington that he believes could avoid massive foreclosures and stabilize the housing market. He envisions the government buying huge numbers of troubled mortgages and re-financing them at lower rates. Under Zandi's plan, lenders would compete at auction to sell their mortgages to the government at a discount.
For instance, the government might pay just $150,000 dollars for a mortgage that was worth $200,000 originally. The government would then refinance the mortgage at a lower level, making it more affordable for the homeowner.
"But I wouldn't let the borrower off the hook," Zandi says. He would put the $50,000 difference into a second lien, he says, "and if house prices ever were to rise and the homeowner were able to sell for more that $150,000, they would share those proceeds with the government."
In the end, this might cost taxpayers $100 billion, Zandi estimates. But, he says, it would be worth it to reduce the suffering of desperate homeowners, stabilize the housing market and get the economy back on track.
Sen. Chris Dodd of Connecticut, the Democrat who heads the Senate Banking Committee and former Federal Reserve Board Vice Chairman Alan Blinder have similar proposals of their own.
Robert Steel, the undersecretary for domestic finance at the Treasury Department, says those plans sound too much like a bailout.
"There are people who bought multiple condominiums in Las Vegas with 2 percent down," he says, "and we don't view that as a matter for public policy. We're not interested in bailing out investors or speculators. And a lot of these suggestions that people are making have that unintended and very unattractive consequence."
President Bush and Treasury Secretary Paulson both agree with Steel's point of view.
Zandi says it wouldn't be hard to identify most speculators, noting that mortgage servicers already know which mortgages are held by investors.
There are other ideas floating around Washington, too. For instance, some banks want to extend government insurance to cover thousands of additional troubled loans.
Federal Reserve Chairman Ben Bernanke, in Florida Tuesday to give a speech on reducing the number of foreclosures, seems more open to government intervention than the Bush administration. He told Congress last week the Fed is studying alternatives, but could not yet recommend further action.