WASHINGTON – The Obama administration's latest foreclosure prevention plan got an “A” for effort from most observers, who said it targets the right group of borrowers – the unemployed and those whose mortgages exceed the value of their homes.
But consumer groups and industry analysts alike said the proposed changes will do little to address a still cumbersome process, investor resistance and continued second-lien hurdles.
The plan is a "real paradigm shift in how they are approaching foreclosure prevention," said Julia Gordon, senior policy counsel for the Center for Responsible Lending. "But so far with the administration's efforts we've seen a real problem on the implementation side."
Many observers said they expect the plan will help only borrowers on the margins. "I don't think it will have a huge impact unless it becomes mandatory," said Bruce Marks, chief executive of the Neighborhood Assistance Corp. of America. "I think you are going to see it [participation] increase, but not enough as necessary until President Obama requires the servicers to do it."
Under the plan announced last week, the administration's Home Affordable Mortgage Program will emphasize principal write-downs over interest rate and payment reductions. In order to participate, lenders must write down the loan by at least 10% and ensure the total loan-to-value ratio on the home is not greater than 115% after refinancing. Lenders will be able to refinance these borrowers into Federal Housing Administration loans. To qualify, homeowners must be current, meet standard FHA underwriting guidelines and have a FICO score of at least 500.
The administration is encouraging principal reductions directly through HAMP, pushing lenders to write down the loan to 115% loan-to-value. Lenders are required to consider borrowers who already have received a trial or permanent modification under the program. Servicers that choose to participate will receive incentive payments for any amount of the loan they forgive over three years – as long as the borrower remains current.
The administration also is targeting unemployed borrowers by calling for three-month forbearance on foreclosure proceedings against those borrowers who recently have lost their jobs. The administration will provide assistance to such borrowers for three to six months to help reduce a mortgage to 31% of the borrower's income based on their unemployment insurance.
Although many critics have said the administration's plan should have encouraged principal reduction from its inception, Michael Barr, Treasury assistant secretary for financial institutions, said Friday that lenders are only now more receptive to the idea.
"There is a change in attitude, perception among servicers and investors from a year ago," Barr said. "I think there is an increased recognition for doing principal-reduction plans."
Diane Casey-Landry, senior executive vice president of the American Bankers Association, said many bankers are doing their own workout efforts which are more flexible than the administration's plan. "It was a lot easier for the banks to operate outside of one of the structured programs," Casey-Landry said. "They see it as too limiting and structured around the borrower. What the bankers are saying is it doesn't allow you to address the unique circumstances of the borrowers."
