The market has had some time to digest the specifics of the Obama Administration’s Homeowner Affordability and Stability Plan, and there is an emerging consensus that the current effort will help millions of borrowers left stranded by previous attempts. It’s far from perfect, but it can bring some significant relief, observers say.
Will the plan really “offer assistance to as many as 7 to 9 million homeowners” as the Treasury promises? “I expect those numbers are the full universe of borrowers who could benefit,” notes David Hamermesh, research director of consumer lending at TowerGroup. “Ever since the debacle with the Hope For Homeowners program, we’ve learned to be very skeptical of these estimates,” he continues. “That being said, I do expect this to be more successful and therefore approach the numbers. The best thing of all, of course, would be for this program to work in conjunction with others and accelerate the recovery so that fewer people need to take advantage of the new program.” He applauds the introduction of “some level of standard solutions.” This includes direction on modifications and “clearly laying out a present value test.”
While the foreclosure plan does not include “explicit protection from lawsuits,” the Helping Families Save Their Homes Act (HR 1106) recently approved by the House of Representatives “does include safe harbor provisions to give servicers protection against some legal liabilities that may arise from losses that investors claim to suffer as a result of modifications,” Hamermesh adds. “This element of the proposed law would be a further step in the right direction to make lenders more willing to pursue modifications.”
Gibran Nicholas, chairman and chief executive officer of the CMPS Institute, is less enthused. He criticizes the incentives for lenders and servicers as “the government subsidizing people for what they should be doing.” Another drawback: “There’s no limit on debt ratio. When credit card debt is included, some of these borrowers could be in excess of 55 percent debt ratio,” says Nicholas. “And the re-default rate will be as higher if not higher than it is now.”
Negative equity isn’t addressed by the Obama plan, either. “The most effective way to bring relief would be to reduce principal, by going into an equity-sharing agreement,” according to Nicholas. “That’s ignored completely.”
The best part of the plan “are Fannie and Freddie’s refi’s,” Nicholas says. He prefers Fannie Mae’s approach because it “allows consumers to go to any banker or servicer, while Freddie Mac limits refinancing to the original servicer. Fannie’s guidelines “offer a huge opportunity for banks to generate business. But you can’t cherry pick, you must solicit a generic audience.”