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Lenders agree to slow down foreclosures Feb. 12, 2008 CHICAGO (MarketWatch) -- In the latest move aimed at halting a swelling and steady flow of mortgage foreclosures, six of the nation's largest mortgage lenders bowed to government pressure and joined forces Tuesday to give all homeowners who are seriously delinquent on their loans another chance. The lenders have agreed to freeze foreclosures for a month to give borrowers and lenders time to work out a repayment plan. Named Project Lifeline, the initiative is a step-by-step approach for homeowners who are 90 days or more behind in their mortgage payments, a circumstance that already puts them in serious risk of losing their homes. These borrowers - many of whom have not contacted their lender -- could begin receiving letters from them as soon as this week. The program is not a solution to the housing crisis but is considered a "pause" in the foreclosure process, giving homeowners an extra 30 days to work out a payment or modification program. Some 1.3 million home loans are either seriously delinquent - meaning 90 days or more - or already in foreclosure, according to the Mortgage Bankers Association. "None of these efforts are a silver bullet that will undo the excesses of the past years nor are they designed to bail out real estate speculators or those who committed fraud," Treasury Secretary Henry Paulson said in announcing the program. "These efforts are to help American families who both want to and can, through a loan modification or refinancing, stay in their homes," he added. He warned, however, that the worst of the housing crisis is still ahead as holders of subprime mortgages come up for interest-rate resets. Lehman Brothers has estimated that about 2.8 million subprime mortgages will reset this year and next at a rate that is 30% higher than the so-called "teaser" rate. The investment bankers also forecast foreclosures to shoot up to about 1 million this year and next, quadruple last year's level. The Lifeline program gives the lenders more time -- and presumably a better chance -- to work through the volumes of troubled loans they face. Many have indicated that they simply don't have the manpower to handle all the business. Paulson was joined by Housing and Urban Development Secretary Alphonso Jackson in unveiling the plan that includes mortgage servicers from Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Countrywide Financial Corp., Washington Mutual Inc. and Wells Fargo & Co., which represent a staggering 50% of the mortgage market. "Project Lifeline is aimed at homeowners who face a real risk of losing their home but have not yet addressed the problem," Paulson said. "For whatever reasons they have not yet taken action. Our hope is that today's announcement will reach them and they will reach out immediately for help, especially now that the foreclosure process is upon them." Reaching out doesn't guarantee a loan revision. Homeowners must provide updated financial information that includes income and other debt that the servicer will use to determine if a workout were doable. If one is created and the homeowner stays true to the workout for three straight months, the loan will be formally modified. The program is open to borrowers not already in foreclosure of prime loans, second liens and home-equity loans as well as the Alt-A and the subprime loans that have crippled many homeowners. Those who qualify for a loan modification must contact their lender if they want to stay in their homes. "If you can't afford to live in a home you will go back to being a renter," Paulson said. The help is not available to owners of investment or vacant properties. This is the latest in a series of steps that Paulson and the Bush administration have taken along with the private sector to avoid a government bailout or something as grand to help stem foreclosures, which can devastate entire communities with empty homes and a steep drop in municipal taxes. The U.S. Conference of Mayors forecast in a report late last year that 2008 will see 361 metropolitan communities take a cumulative economic hit of $166 billion. Paulson has spearheaded the Hope Now alliance, which includes 25 of the nation's mortgage servicers. The membership has grown from 60% of the subprime mortgages servicers to 94% since it was launched in October. The number of daily calls on a nationwide helpline, 888-995-HOPE, has surged to 4,000 from 625. In December, the groups announced a controversial plan to freeze interest rates for some subprime borrowers. Not enough, say some To many, Tuesday's action still isn't enough. "It's frustrating to watch millions of homeowners who are being forced into foreclosure and the economy falling apart while we continue to hope that the foreclosure crisis will solve itself without any meaningful intervention," said James Carr, chief operating officer of the National Community Reinvestment Coalition. "It's one more baby step in the right direction," he said. "What we need is a major-league showing to fix the problem." Carr said that the plan assumes many homeowners aren't contacting their lenders. They are, he said, but can't get the help they need. "The lenders are flatly overwhelmed," he said. At issue too is the dropping value of homes. If a lender "modifies" a loan, it doesn't address the larger problem of the loan being higher than the updated value of the home. For many homeowners and lenders alike, Project Lifeline is simply delaying the inevitable foreclosure, said Bob Moulton, president of the Americana Mortgage Group. That's what's prompting many homeowners to walk away from the investment. "No lender wants to be in the real estate business," Moulton said. "This 30-day effort is prolonging a situation where it might give a homeowner an opportunity to do a workout program with that specific lender. The lender will probably have to take a little bit of a haircut on the loan and the homeowner might have to come up with more out of pocket." If the program works the way Hope Now and the servicers expect it to, it should help servicers too. "Lenders don't want vacant houses," Moulton said. "Vacant house can go down in value very quickly." Still, Paulson and Moulton both said many homeowners may choose to walk away from the investment. "The problem is there are a lot of homeowners who have negative equity in their homes," Moulton said. "Some homeowners can still make the payments even if their loan is higher than the value of their home, but they don't want to. "No program can bring every struggling homeowner to the counseling and evaluating process and we cannot help those who choose not to honor their obligations," he said. Others can't be helped. According to the MBA, 40% of the subprime ARMs that fell into foreclosure in the third quarter were loans that had gone through a modification or repayment plan. Moulton's advice: Tough the housing correction out. "This is going to have to run its course," he said. "It's going to hit hard. There are a lot of situations that are going to be heartbreakers out there for people who owe more than the value of their house. "But this is not a national epidemic," he said, noting that Michigan and Florida, for example, have housing problems that are derived from state economic issues or overzealous investors. Still, this is not likely to be the last initiative from the lenders or the government. "Let's be clear and honest," HUD Secretary Jackson said at the press conference. "One action alone will not solve every problem in the housing market. "Rather a series of incremental steps provide the best chance, maybe the only chance, for serious, on-point solutions that directly address the complex problem we face," he added.
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