MADELEINE BRAND, host:
Home prices may be stabilizing in some parts of the country, but foreclosures are not. Millions of homes are in danger. More than one in five homeowners is now underwater on their mortgage, meaning they owe more than their house is worth. Here in California, about 10 percent of all homeowners are in default, meaning they are on their way to being foreclosed on.
The federal government has a program to help people facing foreclosure. It provides incentives for banks to adjust loans. It's run by the Department of Housing and Urban Development. And HUD Secretary Shaun Donovan is here now. Welcome to the program, secretary.
Secretary SHAUN DONOVAN (Department of Housing and Urban Development): It's great to be with you.
BRAND: Now, under your program, only about 200,000 loans have been modified so far, I understand. But millions of homeowners are in danger of being foreclosed on. How can you, how can the federal government force banks to modify these loans more quickly before homeowners are actually forced out of their homes?
Sec. DONOVAN: Well, the first thing I would say is the 200,000 loans, in the short time that the program has been operating, is actually a significant achievement. It's larger than any other prior effort. And we are now seeing more than 20,000 modifications a week.
Having said that, one of the things that I will say very clearly is we recognize, when the president announced the program, we said we were aiming to get to three to four million modifications over three years. And that we realize we have to get to that scale to be able to have a real impact on this problem.
We are not there yet, but we have been meeting with the banks and made it very clear to them that they had to step up their efforts, to get to as many homeowners as possible. And we set a specific goal of getting to 500,000 modifications underway by November 1st.
BRAND: Now, there have been several reports out recently that have looked into why it's not necessarily in the banks' best interest, for a lot economic reasons, to modify loans. One of them came from the Federal Reserve Bank of Boston, who says mortgage companies may be reluctant to modify loans because they collect these lucrative fees on foreclosure. And what can you do to remove that incentive?
Sec. DONOVAN: Well, I would say two things about that. First of all, one of the reasons that we got into this problem in the first place is the complexity and often, frankly, the conflicts in incentives and interests of so many of the different parties involved. So, we've done a couple things to really try to deal with those.
One is we've created a set of incentives that compensate the servicers for the real work that they have to do, in a way that we believe is, at the very least, comparable with, if not, better than what they would get through the kinds of fees that you're talking about. So that's one thing.
The second thing to remember, though, is that ultimately it's not the servicer that controls the fate of the loan, it's the owner of the loan. And ultimately, it is a benefit to the owners of the loans to actually get them modified.
BRAND: Now, let's talk about the families because a lot of these loans, they're just being adjusted in terms of the interest rates, or in terms of length of the loan may be extended, but the principle is rarely adjusted.
And with so many homes underwater, meaning the house is worth less than the amount owed, why not attack the principle? Is it possible that you're just delaying the inevitable, that these homes will eventually be foreclosed on down the road, even with an adjustment?
Sec. DONOVAN: Well, we looked very carefully at this issue in designing the program and there's a clear consensus that the affordability of the loan is the key. The vast majority of people will actually continue to make their payments. If they are truly affordable, and our program says 31 percent of your income, then your incentives are to stay in that home.
BRAND: But if you're a homeowner and you're looking at a mortgage payment that basically just reduces the interest, and the value of the house is so far below what you're owed on, and you're struggling to pay these - yes, you can pay it every month, but it really is a struggle - what's to prevent you from saying I'm just going to walk away from this?
Sec. DONOVAN: My question would be where are you going to go?
BRAND: You're going to rent.
Sec. DONOVAN: If your payment is affordable to you, if it's 31 percent of your income, it's likely that you're not going to find an equivalent place to rent that's going to be any cheaper.
But second of all, for many of these families, they may have lived there for five or 10 years, it's a place where their kids go to school, it's much more than a home. And people don't make decisions in that way and that's certainly what the evidence in the studies show.
Conversely, we can't think about every family here being hopelessly underwater. The vast majority of families who are underwater are underwater by an amount where they have a reasonable expectation, within five years or perhaps even shorter than that, that they can start to build equity again in their home.
BRAND: But are you relying, in part, on a hope that the economy will not slide further and that people will be able to find jobs again, or full employment again, and that the unemployment rate won't continue to increase?
Sec. DONOVAN: Madeleine, it's a very important point. And that's why we're going to have to attack unemployment and we're doing that. While at the same time, we're attacking the problem with the mortgages themselves.
BRAND: Secretary Donovan, thank you very much.
Sec. DONOVAN: It's great to be with you.
BRAND: Shaun Donovan is secretary of Housing and Urban Development. He spoke to us from his office.
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