Is the grand plan by FDIC Chairman Shelia Barr in trouble? Bair has been promoting a plan to use $50 billion of the Treasury’s $700 billion bailout funds to guarantee that home loans renegotiated by banks get repaid. Her proposal is modeled after FDIC efforts to quickly restructure troubled loans at IndyMac, the failed thrift that regulators seized in July. But it’s been nearly a week since the plan was first floated , and a story in the Wall Street Journal today suggests the plan has run into opposition in the White House.
It’s hard to tell if that’s the case. White House spokesperson Tony Fratto will only say that the Bush Administration is reviewing a number of proposals for restructuring loans, and that the Journal story “is inaccurate.” Clearly, though, once a new president is elected the pressure will build for some sort of help for homeowners.
Other federal efforts to right the housing collapse seem to be getting off to a slow start. The Federal Housing Administration’s ‘Hope for Homeowners’ program, launched Oct. 1., was designed to keep 400,000 troubled homeowners in their homes by swapping risky loans for conventional 30-year fixed rate ones with lower rates. But the government received only 42 applications from homeowner in the program’s first two weeks and all have been rejected, according to the Housing Wire blog.
Even Spain seems to be showing the U.S. up, declaring a moratorium on mortgage payments for homeowners who have lost their jobs.
Either under pressure from state regulators, as in the case of Bank of America, or under the their own initiative, as JP Morgan Chase recently announced, big banks are taking steps to stop foreclosures and renegotiate loans. Housing advocates say the Bush Administration should be doing so as well. “If we could get (Treasury Secretary) Paulson to do for Fannie Mae and Freddie Mac what Shelia Barr has done for IndyMac, that would overnight be a huge benefit for homeowners,” says Bruce Marks, founder of the non-profit National Assistance Corp. of America.
Crafting an effective mortgage bailout won’t be easy. It has to be done in a way that helps those who are in danger of foreclosure, but without providing an incentive for otherwise healthy homeowners to default. Moreover, there is still some debate as to whether keeping trouble borrowers in their homes ultimately helps the general population. A recent study by the St Louis Federal Reserve of foreclosure moratoriums put in place by 27 states during the Great Depression found that banks cut back on lending and borrowing rates for home buyers were higher because lenders couldn’t take property in default back and resell it.
Raphael Bostic, a former senior economist at the Federal Reserve who now teaches at the University of Southern California, says that if the federal government renegotiated trouble homeowner loans, either by providing assistance to private banks or through buying the loans themselves, it would help put a floor under housing prices. “Everyone is trying to figure out where the bottom is,” Bostic says. “People are not going think there’s a bottom if they know there’s a flood of distressed assets still coming up for sale.”
Both presidential candidates were in favor of renegotiating homeowner loans. Those in the real estate industry are hoping the next president will bring some calm to an uncertain market. Lorna Borenstein, president of Move.com, a real estate information company that includes Realtor.com, says she was at conference for women executives in early October when the news of the big bank-bailout bill passing was announced. “There was a huge round of applause,” she says. Now she hopes a new president will be a catalyst to brighten a gloomy picture. “We have an oversupply of houses on the market,’ she says. “Until that gets cleared out you won’t see any stabilization in prices.”