48% Underwater

This must have happened while I went on vacation:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Ho. Lee. Crap.

Being underwater not only affects being able to keep the home, but it profoundly affects individual mobility. You become chained to your home, waiting for it to increase in value, even if there are no jobs in your area or you get an attractive offer elsewhere. That's just one element of how foreclosures and underwater homes impact the economy.

How in the world can we fix this? So far the foreclosure mitigation options offered by the White House have been inadequate. Though sales are creeping back, if a second foreclosure wave strikes the market could remain unsettled for some time. The Obama Administration is moving toward encouraging affordable rental units, which I think is a good sign.

The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.

The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.

Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home.

That deals with a future problem of ensuring that the only people with mortgages are the ones who can pay for them, however. It does little for those underwater in their home or facing foreclosure right now. For that group, I think we need to seriously look at right to rent, converting homes that would otherwise be foreclosed into rental properties for the families for a set period of time. This would solidify neighborhoods, give banks a revenue stream instead of having a foreclosed home sit on the market (although they're probably making more from foreclosure in the short term, as it stands right now), and help people stay connected to their communities. Dean Baker writes:

It's time to try a new route for helping homeowners. There is a simple alternative: Congress can pass legislation that gives homeowners facing foreclosure the right to stay in their home as renters. This "right to rent" policy would require no taxpayer money, no new bureaucracy and could immediately benefit homeowners facing foreclosure.

The basic idea is simple. In recognition of the extraordinary crisis, Congress would give families that took out mortgages at the peak of the boom and are facing foreclosure the option to remain in their homes as renters for a substantial period of time -- five to 10 years -- while paying the market-rate rent. Earlier this year, Freddie Mac launched a similar policy, giving former homeowners the option to lease their recently foreclosed properties, but on a month-to-month basis. That was a positive step, but it does not give families the housing security they need....

Although they would lose ownership of their homes under "right to rent," the residents would be able to stay in their homes, neighborhoods and schools. This would provide families facing foreclosure with needed stability and housing security.

This would also help with loan modification, as banks would have a choice to change terms or accept rent. Much like cram-down, it would put the playing field level again, instead of hopelessly tilted in favor of the banks.

We need to do something with the first principle that reducing foreclosures is the goal, not satisfying the banks. Cram-down probably makes more sense, but I appreciate the thought behind right-to-rent.

...slightly related, this WSJ editorial criticizing Vermont for having too many well-informed consumers and industry regulations, leading to "pitfalls" like fewer foreclosures and healthier banks, is worth reading if you want a hoot. If only we in California had the pitfalls of Vermont!

Get It In Writing

Despite some slightly better housing news in the past few months, the threat of foreclosure still hangs over the head over a record number of Americans, and this shock to the economy still threatens recovery. One thing is clear - the modification programs attempted over the past year haven't worked at all. In fact, banks would rather foreclose than unentangle the maze of who owns the mortgage and how to legally alter the terms.

Government initiatives to stem the country's mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded.

Policymakers often say it's a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.

The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms.

A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don't want to help these borrowers because waiting to foreclose can be costly.

Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them.

Because it's in the banks' economic self-interest to foreclose, the plans brought forth by the government to avert foreclosures haven't had much of an effect. Banks are using all sorts of tricks and schemes, to delay modification almost endlessly and raise questions about who qualifies. So today, the President met with mortgage lenders and struck yet another handshake deal.

The Obama administration, scrambling to get its main housing initiative on track, extracted a pledge from 25 mortgage company executives to improve their efforts to assist borrowers in danger of foreclosure.

In an all-day series of meetings Tuesday at the Treasury Department, government officials reached a verbal agreement with the executives for a new goal of about 500,000 loan modifications by Nov. 1 and stressed the program's urgency.

The sessions came amid concerns that the Obama administration will fall far short of its original goal of helping up to 3 million to 4 million troubled borrowers with modified loans.

The bottom line is that voluntary deals with the lending industry or practically any company in finance will not work. They've been deliberately dragging their feet on offering modified loans because they have every incentive not to do it. I don't know how many different housing bills you can enact without teeth and expect some different result. The Administration is acting like they have no authority on this front. And until they demand formal agreements instead of assurances, they'll be trampled upon over and over again.

Loansharks In Second Life

I don't think I'm being hyperbolic by saying that the average subprime mortgage broker should probably be in prison by now. They took loans that their customers had no possibility of paying back, often by forcing them into exotic arrangements where their payments would shoot up by double after a reset. They got bonuses for putting people into a higher interest rate than what the borrowers could qualify for. Now lots of those loans have gone sour, but the broker's company has already passed on that risk in the form of mortgage-backed securities. Indeed, these same lenders who preyed upon homeowners by getting them into residences they couldn't afford are now ripping them off again by setting up loan modification companies.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.” [...]

FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company.

The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers.

“Our job was to get the money in and then we’re done,” said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. He recounted his experience, he said, because “I really feel bad.”

Before state regulators and the Feds figured out this was going on, hundreds of loan modification companies took probably billions from distressed homeowners and provided virtually nothing in return. They saw opportunity in crisis - and they also CREATED much of the crisis by selling the homes to people who couldn't afford them in the first place.

Special place in hell reserved for them...

Not So Green Shoots

I acknowledge that there are signs that the economy is on an upswing. But the optimistic scenarios don't jibe with all the data. First of all, the deficit keeps rising due to continued unemployment. That's to be expected, but it will still make it harder for any second stimulus to occur, meaning that we're pretty much stuck with the policies currently in place. The lower tax revenues has led to the first April deficit in 26 years, as typically April is a big enough revenue month that money coming in outweighs money going out. And the deficits are affecting the US credit rating, the ability to obtain cheap money.

Now, I don't want to dwell on the budget deficit, especially because in the near term it can't matter as much as getting people back to work. But it constrains the politically possible in Washington, and it will prevent the Administration from delivering additional help to the economy, which clearly it desperately needs:

Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.

"April was a shocker," said Rick Sharga, a spokesman for RealtyTrac. "I would have bet on a dip because March foreclosures were so high.

Instead, filings inched up 1% from March and rose 32% compared with April 2008.

Thanks, opponents to cramdown!

Now, interestingly enough some banks have been so chilled by threats of prosecution in the states that they have started to settle out of court in predatory lending cases, with much of that money going toward reducing principal for homeowners. If that practice becomes more widespread, perhaps we can stop this second wave of foreclosures.

One hears a lot about loan modifications these days. So far there are two basic approaches.

I) The borrower is given relief in the form of a lower interest rates and stretched-out maturities. The homeowner stays in the home.

II) The bank will accept a deed in lieu of the mortgage. The homeowner is out of the home.

There have been very few cases where a homeowner is allowed to stay in the home and achieve a principal reduction. The Boston settlement opens the floodgate for principal reduction. It is the essence of the agreement. All 714 borrowers are now eligible for principal reduction and the money is just sitting there waiting to be collected.

One can imagine the conversations between neighbors in Boston:

A: “Good news finally! I just got 35% net off my first and second mortgage.”

B: “Wow! How did you manage that?”

A: “I was lucky enough to get my mortgages through Goldman Sachs. They did a deal with the Mass AG and I win the lotto!

B: “I have my mortgages with Indy Mac Bank can I get reduction too?

A: Sure. Here is the number to call. Now lets party!

I really want the Administration to succeed, but I hope they aren't being swayed by all this happy talk. We're still in a dangerous place.

It Comes Back To Housing

This was a really lucid article from Steven Gjerstad and Vernon L. Smith explaining the role of housing in the financial crisis, in case you're having trouble explaining this to your friends and family:

The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.

But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.

And that's where we are. The resets from all those ARMs could be foreseen pretty easily, but with rising prices, analysts who erred on the side of irrational exuberance thought people could just refi their way out of them and be saved by the price increase. It never was sustainable. And the securitization of the loans turned would could have been just a nasty problem confined to the specific sector into a global meltdown. When small towns in Tennessee and Alabama are swapping credit defaults and derivatives, you can see the problem clearly.

There's been a lot of talk about how we're saving the banks, but somewhat less on what we are doing at the root of the problem. There's a compelling argument to let this run its course and allow housing prices to revert back to the mean. That may be so, but rising foreclosures STILL destroy value in the market, because no buyers become willing to accept a property at anything but fire sale prices, constraining the ability of people who want to sell their home for other reasons and really upending the market. Today the President held a housing refinance roundtable and seemed to suggest that part of the solution lay in more refinancing:

What you've seen now is rates are as low as they've been since 1971. Three-quarters of the American people get their mortgages through a Fannie Mae-Freddie Mac qualified loan. And as a consequence of us being able to reduce the interest rates that are available, we have now seen some extraordinary jumps in the rate of mortgage refinancings.

And everybody here represents families who have saved hundreds of dollars a month, thousands of dollars a year in some cases, and that's money directly in their pocket. More importantly, what it's allowed them to do is to consolidate their loans in some cases, reduce the length of their mortgages in other cases. It has given them the kind of security and stability in their mortgage payments that a lot more people can take advantage of.

So the main message that we want to send today is, there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates. That is money in their pocket. And we estimate that the average family can get anywhere from $1,600 to $2,000 a year in savings by taking advantage of these various mortgage programs that have been put in place.

This makes sense in terms of economic stimulus but does absolutely nothing to restore the housing market, IMO. One can view pushing down mortgage interest rates and encouraging refinancing as a way to put money in the pockets of homeowners, money that they may be willing to spend. But the universe of people who just need a reduction in their interest rate to save their home is sadly pretty small. The loan modifications that have been interest-only frequently resulted in foreclosure down the road. Obviously this is not the only element of the Obama plan - and I see the point in highlighting it, because it could mean millions of dollars circulated into the economy, as well as a make-work plan for loan servicers - but it reflects a willingness to just tinker around the edges of housing policy instead of really attacking the problem.

Barney Frank's proposals to crack down on the types of loans servicers can offer by stopping 100% securitization and lots of subprime lending makes a lot of sense, but that's a second-order problem. The first-order problem is how to stop all these foreclosures. I'd like to see more attention paid to that.

The Housing Death Spiral

In fairness, the new Obama Administration housing policy has not had the time to work. But judging on past performance, and based on the fact that principal reductions aren't really part of the Obama plan, I would expect the same results:

Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said.

Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends “are worsening,” the agencies said.

“For the year and this quarter, we saw the same trend that we saw last time: quite high re-default rates, no matter how we measured them,” John Dugan, the U.S. Comptroller of the Currency, said in a conference call with reporters.

Lenders including Citigroup Inc. and loan-servicing companies are adjusting mortgages by lowering interest rates or crafting longer-term payment plans. The Obama administration is acting to help as many as 9 million struggling homeowners by using taxpayer funds to pay lenders such as bond investors, mortgage servicers for reworking the mortgages.

Dugan said higher re-default rates are likely related to stressful economic conditions and new loan plans are not producing significant reductions to make mortgages sustainable.

It's frustrating, considering that banks aren't even acting in their own best financial interest. Given the falloff in the market, foreclosing a home and reselling it would return less money than reducing principal and letting the homeowner stay in the home. But the loan servicers don't seem to want to deal with unwinding the securitization of the loans, and deal with potential lawsuits from writing down their security.

Why isn't that happening? Ah, those pesky securitizations. Although investors litigating to block mods is the oft-given reason for not taking this course of action (a presumed to be high number of securitizations either bar or restrict mods), my impression is servicers simply have not wanted to fight this fight (they have clearly defined compensation in the case of foreclosure versus no rewards for mods, save the fees under new government programs). Paying legal fees to fight investors is an even more dubious business proposition (it's a near certainty they can't charge those expenses to the securitization trust, and it would thus come out of their bottom line).

That is a long winded way of saying I doubt that there has been much study by legal talent as to how to overcome mod restrictions in servicing agreements. Given the high level of fraud (in a small sample, Fitch found evidence of fraud in every loan file it examined), there might be ways to persuade investors they have more to lose than gain by pursuing this line of legal action.

Major banks and financial firms won't even work with mortgage brokers anymore, suggesting that the entire market is hopelessly broken. New rules and standards for loans going forward are on the way, but that does nothing for those struggling to make payments right now.

The answer is, and has always been, to allow bankruptcy judges to modify the terms of the loan, which would encourage the loan holders to work out a deal. But while that passed the House, the Senate "moderates" have refused to move forward because the corporate interests holding the strings on them have refused to allow it.

Ted Lieu Versus The Housing Crisis

This week, Barack Obama announced the details of his plan to save up to 9 million homeowners facing foreclosure from losing their residences. The goal is to place a floor on foreclosures and help people whose rates have reset to work out loan modifications with their lenders. The federal legislation that passed the House which would allow bankruptcy judges to modify the terms of loans, which gives homeowners a powerful stick to force the lenders to pre-empt a cramdown from the judge, will also help this.

Unfortunately, the class of homeowners who would be left behind in this plan are those who are "underwater" on their homes; that is, they owe more on the principal of the home than the current value. And that's an accurate depiction of a very large segment of California homeowners.

The Obama administration's plan to stave off foreclosures could fall flat in California, where nearly one-third of mortgage holders are underwater on their loans -- many of them by amounts that would disqualify them for government-sponsored refinancing.

The problem is likely to be especially acute in areas like the Inland Empire, where homes have lost more than 40% of their value in the last year and nearly half the homeowners owe more on their loans than the properties are worth.

"They're underwater by six figures in many cases," said Greg McBride, a senior analyst with Bankrate.com. "Many homeowners in Southern California are left to twist in the wind."

Under the Obama plan, people who are current on their mortgages could obtain new loans with lower rates for as much as 105% of the value of their homes. That means people could borrow $315,000 against a home worth $300,000.

The problem is that in California, many people owe far more than 105% on their homes, McBride said.

The thinking may be that stopping the worst foreclosures from occurring and lowering the overall rate will stop the dramatic slide in home prices and give those who are underwater a chance to make up the difference. But we may not have that kind of time, as so many are drowning in debt with seemingly no hope to dig out. In addition, the 10.1% jobless rate here (and rising in February, to be sure) will mean that a substantial number of honeowners will simply be unable to pay no matter what kind of modification can be worked out, and so the wave of foreclosures will continue.

Into this troubling situation has stepped Ted Lieu, the legislature's point person on the housing crisis. He is calling on the Obama Administration to do more.

"Many distressed homeowners in California are underwater by more than 5% on their home loan, which makes them ineligible to apply for refinance assistance," said Lieu, author of a state foreclosure moratorium law that Gov. Arnold Schwarzenegger signed last week.

Lieu said he would meet next week with administration officials to discuss his proposed changes [...]

Lieu said that whatever its flaws, the Obama plan addresses a root cause of the nation's economic woes by trying to help homeowners rather than "following the Bush administration policy of just throwing money at the banks."

Nonetheless, he said, the refinancing limit should be raised, perhaps to 115%, to help more people obtain cheaper loans.

"Otherwise, you're just going to end up helping a lot of people outside California," Lieu said.

It's just hard to put a single national standard on the plan when the circumstances are wildly different depending on the region.

Let's also note that Lieu's own housing legislation will begin to kick in shortly. This is from a press release:

My legislation, the California Foreclosure Prevention Act, will now compel a lender to modify a loan well before a homeowner should need to seek a solution from a bankruptcy court. Beginning in May, California will impose a 90 day foreclosure moratorium unless a lender offers a comprehensive loan modification program based, in part, on criteria set forth by the Federal Deposit Insurance Corporation. By adding a strong disincentive if a lender refuses to modify home loans, California’s action not only compliments the President’s plan, but gives him another stick to stabilize the real estate market and this economy.

It's worth praising those lawmakers who are taking the lead, especially on a problem of this magnitude which is such a major contributor to the overall economic meltdown in California.

Banksters Still Banksting

There is an expected vote today on the compromise "cramdown" bill in the House. There has already been a recorded vote on the rule today, and not one Republican voted for it, but it passed anyway. They are truly sinking further into irrelevance.

The compromise bill, as I've said, is not bad, although the major concessions are that people "underwater" in their homes (owing more principle than current value) won't get help, and the reductions are likely to be on interest rather than principle. Not great, but if people can stay in their homes as a result, probably OK. Right now 1 in 8 homeowners in the country are behind in payments, so they need whatever relief they can get.

However, the group likely to get the most relief out of the eventual loan modification process are the lenders themselves.

By the Obama administration's account, its new housing rescue plan, which goes into effect on Wednesday, will pull up to 4 million homeowners back from the brink of foreclosure. It also offers another 5 million or so excessively indebted borrowers the chance to refinance into lower-interest loans.

But the biggest winners in the government's $275 billion homeowner bailout just might be the mortgage brokers who were largely responsible for creating the disaster in the first place. Many are now reinventing themselves as heroes of the mortgage crisis by offering loan modification services. And between its new cash support and the refinancing program, through which they can benefit from the federal aid via brokers' fees, the Obama homeowner bailout might as well be a full employment program for them. The Treasury Department's FAQ for borrowers warns, "Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance." But nothing in the homeowner bailout prevents these middlemen from stepping in and taking a cut.

In California, home to nearly one-fourth of all the foreclosures in the country, there are now applications pending from some 500 brokers and real estate agents seeking to get in on this new line of business, which hardly existed six months ago (but now has its own trade group). California's Department of Real Estate, which licenses mortgage brokers and real estate agents, has so far authorized more than 200 companies to negotiate with mortgage lenders to modify loans, and the list grows longer every week. They may charge borrowers whatever they choose for this service, as long as they only collect a portion of the fee upfront and take the rest once the job is completed. The going rate ranges from a flat $2,985 to about 1 percent of the amount of the mortgage, or $4,000 on a $400,000 loan.

The problem is that the majority of loan mods are lousy deals for homeowners. Federal banking regulators recently determined that more than half of all mortgages that were modified by lenders in early 2008 ended up heading into foreclosure again in less than six months. Most loan modifications, in fact, dig borrowers deeper into debt.

Especially when you consider that the Administration sets the average price of this modification at around $10,000 a home, which is a pittance, but with interest accruing over 30-40 years could be massive, you see the game being played here. And this is just one way for disgraced brokers to make money out of this chaos. Here's another.

...it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.

Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

The Times doesn't call it fraud, but that's a credible accounting of things.

These are the consequences of condensed power, yes, but also the consequence of a lack of accountability for those who caused this crisis. Government could actually go ahead and strip these people of the license to do business in this industry - especially Countrywide, known to have defrauded their customers.

UPDATE: The bill has passed the House. On to the Senate.

We Own You And You're Going To Do What We Say

Another string attached to the TARP money, and it's a good one:

As President Obama rolls out his $75 billion aid program to stem the tide of foreclosures among cash-strapped Americans, one key point should be emphasized: Banks participating in the government's $700 billion financial bailout are required to help modify home loans, according to the administration.

"[W]e have guidance as part of [the Troubled Assets Relief Program] that anyone receiving TARP funding must participate in this program," Housing and Urban Development Secretary Shaun Donovan told reporters today.

This is a big stick that will be attached to the carrots and incentives to get lenders together with homeowners to modify loans, the biggest one being that it costs more to let a house slip into foreclosure than to modify the loan. That doesn't mean it will definitely work. Loan modification is a tricky business, especially with all the fees tacked on.

When her brother could no longer help support her, Luzetta Reeves asked her small mortgage company to cut her monthly payments. It did — by 11 percent — making it possible for her to afford her house here on her modest fixed income.

Luzetta Reeves was able to remain in her home by modifying her mortgage, which cut her interest rate to 5.6 percent from 8.9.
In Miami, Jeffrey Mitchell saw his family income drop just as real estate taxes and insurance premiums increased, making his monthly mortgage payments crushing. He got a lower interest rate, too. But with the added fees and penalties, his monthly payment remained the same. He is now back in foreclosure [...]

The nation’s 14 largest banks reported that more than half of the loans they modified last year were delinquent again after just six months, according to the federal bank regulator, the comptroller of the currency. But several small mortgage companies like the one that helped Ms. Reeves, which have been pursuing modifications longer, say that less than 25 percent of their modified loans became delinquent again.

“It’s becoming more and more clear to us that if you do real modifications the default rate is significantly lower,” said Tom Miller, the attorney general of Iowa, who has led a group of state officials pushing the industry to modify more loans. “They shouldn’t be called modifications if people pay more or approximately the same.”

They have to cut principal, not just interest rates. Otherwise we'll be back here in 6 months. I think the Obama plan can work, but it's going to take some sharp work.

Foreclosures Finally Getting A Look

Post-stimulus, we still have an insolvent banking industry and a housing market in free fall. Prices continue to drop at an alarming rate, and there doesn't seem to be a bottom. And 2008 was a record year for foreclosures, which depress prices, lower property values and suck money out of the system.

Clearly we need a solution. And this is what the White House is looking at doing.

The Obama administration is considering a proposal to help distressed homeowners by subsidizing lenders who cut the interest rate on mortgages, according to sources familiar with the discussions.

The sources cautioned that the administration is still weighing several options for addressing the country's growing foreclosure problem. The Treasury Department has set aside $50 billion for a homeowner relief program, which officials said was likely to be announced within the next week. The sources spoke on condition of anonymity because the plans are not final.

The initiative would include both carrots and sticks for lenders, said lawmakers briefed by the administration. For example, it would probably endorse legislation to allow bankruptcy judges to change the terms of mortgage loans, a measure opposed by the industry. But the program would also include legal protections for lenders that modify loans but fear being sued by investors. Government subsidies could be among the inducements for lenders, the lawmakers said.

Under one proposal being actively discussed, the government would share the cost to lenders of reducing interest rates for cash-strapped borrowers, the sources said. For example, consider a homeowner with a $200,000 mortgage and a 9 percent interest rate who now pays about $1,700 a month, including taxes and insurance. Lowering the interest rate to 5 percent would reduce the payments to about $1,160. The government and industry would each chip in to cover the difference, about $540.

If this is just talking about existing homeowners and not slashing rates for new homes below what the market will bear, which will reinflate the housing bubble for no reason, I think there's some merit to it. It looks like the lenders are ready to get into this as well. But it should be combined with other measures.

First of all, there should be an absolute moratorium on foreclosures for 60-90 days. Fannie and Freddie are suspending sales, which is good, and some big banks are temporarily halting them as well. This time is needed for implementation of this loan modification idea, which is essentially the brainchild of Sheila Bair at the FDIC. There's going to be some moral hazard in bailing out people who made bad decisions in getting a home, but it's a pittance compared to all the corporate welfare money promised, and considering that predatory lending put homeowners into mortgage products they didn't even want, I think we can live with a little excess at the margins. Reuters has more.