Administration Works On Root Of Housing Crisis

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It's MORNING EDITION from NPR News. Good morning. I'm Steve Inskeep.

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And I'm Linda Wertheimer. The efforts to prevent foreclosures so far have not been enough to stop millions of people from losing their homes. Yesterday, the Obama administration announced details of a housing rescue program to try to change that by improving incentives for lenders to mark down mortgages. NPR's Chris Arnold reports.

CHRIS ARNOLD: Washington seems to have gotten religion about taking bolder steps to fix the foreclosure mess. Many Americans don't like the idea of bailing out people who made bad decisions, whether that's bank executives or homeowners. But in recent testimony before Congress, Fed Chairman Ben Bernanke explained it this way.

Mr. BEN BERNANKE (Chairman, Federal Reserve): If your neighbor smokes in bed and sets his house afire and you live in a neighborhood of closely packed wooden houses, you could punish him very severely by refusing to send the fire department. And then he would probably learn his lesson about smoking in bed, but unfortunately, in the process, he would have the entire neighborhood burning down.

ARNOLD: Most economists now agree that millions more foreclosures would be like throwing gasoline on the current economic fire. So, a part of the Obama administration's new housing rescue plan aims to help three to four million homeowners by modifying their loans to lower their payments. It's only for owner occupants, so no investors who are flipping condos. Homeowners have to document their income. For investors who own the loans, the monthly payments they collect will be reduced, but they'll still get more money than they would through foreclosures. But the question is: Will it work?

Mr. MARK PEARCE (Deputy Commissioner of Banks, North Carolina): This is a quantum step ahead of anything that's been tried so far from the government end.

ARNOLD: Mark Pearce is the chief deputy banking commissioner in North Carolina. He likes the program's focus on making mortgages really affordable. The goal is 31 percent of the homeowner's gross income.

Mr. PEARCE: If a plan is going to work, this is it.

ARNOLD: Pearce says the plans to help homeowners to date really haven't been working. He's been gathering data along with other regulators and some academics. Pearce says 70 percent of homeowners facing foreclosure aren't even talking to their lenders about working something out. And then in the cases where the lender has offered the homeowner a plan to try to help them keep their home, Pearce says most of the time it doesn't lower their payments.

Mr. PEARCE: It's either kept the payment the same or it's increased their payment.

ARNOLD: That might sound bizarre, but what happens is that missed payments and late fees pile up and the lender ends up wanting even more from the homeowner.

Mr. PEARCE: I don't know about you, but if you're a struggling homeowner trying to save your home, the notion of paying more than you already couldn't pay I think is not likely to lead to success.

ARNOLD: Scott Talbot is with the industry group the Financial Services Roundtable. He says lenders have been helping hundreds of thousands of people.

Mr. SCOTT TALBOT (Senior Vice President Government Affairs, The Financial Services Roundtable): Nobody wins in a foreclosure. Period. So the industry is working hard to ensure that Americans stay in their home.

ARNOLD: But Pearce and others say that the incentives inside the mortgage industry have just been all out of whack, and that's been keeping lenders stuck in debt collection mode. John Taylor agrees. He's the president of the National Community Reinvestment Coalition, a group that's been helping homeowners negotiate with lenders.

Mr. JOHN TAYLOR (President, The National Community Reinvestment Coalition): The key to this whole process is an entity or an institution called the servicer. They are the key lynchpin to this whole plan working.

ARNOLD: Okay, here's how this works. You've got all these investors all over the world who own these loans, but somebody else has to collect the payments and manage the loans. That's the loan servicer. And so far, those loan servicers have had no incentive to take on all the extra work of doing loan modifications. Taylor says it's cheaper and easier for them just to foreclose on people.

Mr. TAYLOR: So I think the government, what they've done very cleverly is recognize you've got to incent the services to do this.

ARNOLD: That makes the Obama plan a lot different from previous ones: the incentives, up to $75 billion for the various parties involved. Loan servicers will get around $4,000 per loan over five years if the new terms are really affordable and the borrower succeeds in keeping the home.

Mr. TAYLOR: The sweetener now is they're going to get paid and get a $4,500 fee for each one they do.

ARNOLD: That's the carrot. There's a stick here, too. Separate legislation would give bankruptcy judges the power to order loan modifications. Still, some housing advocates are skeptical. They think the sheer size of the foreclosure mess will still just be logistically overwhelming for the mortgage industry, and they worry the Obama plan won't really be able to reach millions of people before they slide into foreclosure. Chris Arnold, NPR News.

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