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Here's what else is needed to make a program like this work. It depends in part on the voluntary participation of investors who own troubled mortgages as well as the companies that service them. Similar programs have tried and failed to bring those parties together to modify a lot of loans. And there's already debate over whether the president's plan will work. Here's NPR's Yuki Noguchi.
YUKI NOGUCHI: There are those in the mortgage industry who think this plan is bigger and better than anything they've seen to date; among them is Howard Glaser.
Mr. HOWARD GLASER (Former Housing and Urban Development Official): For the last two years, the federal government has been employing a squirt gun to put out the forest fire in the housing market. The Obama plan is a howitzer aimed at that problem, by contrast.
NOGUCHI: Glaser is an industry consultant and former Housing and Urban Development official under President Clinton. He says previous government and bank plans designed to modify loans haven't worked because it made no financial sense to most of the parties involved. So even if the borrower, the homeowner, could afford a lowered payment, Glaser says most investors who own those loans weren't game, because they stood to make more money letting a home go into foreclosure rather than working out a deal with the homeowner.
And the mortgage servicer, the company hired to administer the loan, faced a similar barrier. Modifying a loan required more time and paperwork, so the servicer stood to actually lose money.
Glaser says President Obama's plan addresses these issues by throwing money at them. It will pay loan servicers to rework loans and it will essentially subsidize modified mortgages. In other words, the government will kick in money to make sure that homeowners pay no more than 31 percent of their monthly income, whether it's less in interest or less in the principle loan amount.
Mr. GLASER: It flips the calculation and in the vast majority of cases will make it a better deal for the investor to modify the loan than seek foreclosure, and that economic driver is everything.
NOGUCHI: Scott Talbott is senior vice president of government affairs for the Financial Services Roundtable, which represents the financial industry. He says he has yet to hear from mortgage investors about whether they'll jump on board with the Obama housing plan. But he expects they will, because it divides the financial burdens in a way he thinks investors will like.
Mr. SCOTT TALBOTT (Financial Services Roundtable): The challenge has been trying to allocate the losses between the investor, the lender and the government, and this proposal provides a solution to that problem. It allocates the losses equally between the lender and the government.
NOGUCHI: But for those who have been calling for more concessions from the financial sector, yesterday's plan falls short of ensuring vast swaths of homeowners will get help.
Mr. JOHN TAYLOR (National Community Reinvestment Coalition): We'll see how it works. We're hopeful that it will, but we're not optimistic.
NOGUCHI: John Taylor is president and chief executive of the National Community Reinvestment Coalition, a homeowner advocacy group. He says to make a dent in the foreclosure crisis, the government needed to make the program mandatory. Specifically, he says, the biggest pitfall of the Obama plan is that it urges — but does not compel — investors to reduce the principal amount owed on home loans.
Mr. TAYLOR: I think what we saw with the redefaults is a lot of loans that where there was simply an interest rate reduction.
NOGUCHI: And with home values decreasing rapidly in some places, Taylor argues that just tinkering with a percentage or two of interest rates might help in the short run but eventually lands many homeowners back in trouble.
Taylor says a more aggressive approach would have involved the government buying the troubled mortgages from investors at a discount. Then, if the government controls the loans, it could rewrite them and ensure that they become affordable for the long term.
Taylor admits such a plan would likely have ignited a firestorm with investors. This debate over how effective the administration's plan will be — and how many people will get help — won't be settled for at least a couple of weeks. The government plans to release specific eligibility requirements on March 4th, when the program begins.
Yuki Noguchi, NPR News, Washington.
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