By VIKAS BAJAJ
Published: October 23, 2008
With foreclosures mounting, Bush administration officials said Thursday that they were preparing to step up efforts to help struggling homeowners.
A senior policy maker told a Senate committee that the administration was working on a plan under which the government would offer to shoulder some of the losses on loans that are modified.
The insurance program could cost tens of billions of dollars, according to a person briefed on discussions about the plan, and would be run by the Treasury Department under the $700 billion financial rescue bill Congress passed earlier this month.
The remarks about the plan, made by Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, came as a new report showed that foreclosure filings jumped 71 percent in the third quarter from a year earlier. At the hearing, Congressional Democrats criticized the administration for not doing enough to help homeowners even as the Treasury and Federal Reserve have moved to inject hundreds of billions of dollars into banks and the financial system.
Ms. Bair, who has been one of the most ardent proponents of loan modifications, acknowledged that more needed to be done. “We are behind the curve,” Ms. Bair told the Senate Banking Committee. “We are falling behind. There has been some progress, but it’s not been enough, and we need to act and we need to act quickly and we need to act dramatically.”
Details of the plan are expected in the next week or two. Ms. Bair told senators that policy makers were contemplating creating standardized loan modification practices that would be used by mortgage servicing firms, which handle billing and collection on behalf of investors and banks. Loans modified under those principles would qualify for a partial federal guarantee. In other words, if homeowners defaulted on their loan again, part of the loss would be borne by the government. It was unclear whether investors or homeowners would have to pay premiums for that protection.
Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, commended the program, which he said he wrote into the rescue package in consultation with Ms. Bair.
“This slender provision alone could help countless deserving Americans escape the foreclosure trap,” he said.
The guarantee program would be used alongside another element of the rescue plan that would have the government directly purchase and modify mortgages.
Since late last year, the government has tried various approaches to limit foreclosures, but analysts say those efforts have not done enough to stem rising defaults. A recent analysis by Rod Dubitsky of Credit Suisse, showed that 44 percent of borrowers whose loans were modified but whose monthly payment did not decrease fell behind on payments again in the next eight months. By contrast, that rate was 15 to 23 percent for modifications that lowered payments, depending on which loan terms were changed.
Why more loans are not being modified is the subject of heated debate. Some in the industry say it is hard to reach borrowers and many of them do not want to stay in their homes anyway. Advocates for low-income homeowners say servicing firms are overwhelmed by defaults. People on both sides acknowledge that modifications are complicated because most mortgages are no longer held by banks. Instead, they are packaged into securities.
The administration’s latest approach of guaranteeing loans appears to be intended to give the servicing firms an incentive to modify loans in ways that they may have been reluctant to do so far. The guarantee could strengthen the hand of firms in discussion with investors who are upset about modifications.
Earlier this summer, Congress created another program, Hope for Homeowners, that also offers government guarantees, though under different terms. In that plan, servicing firms that willingly write down delinquent loans and pay a premium can have the loan refinanced by new mortgages that are guaranteed by the Federal Housing Administration. When homeowners eventually sell their homes, they have to share any profits with the government.
In the Senate hearing, Brian D. Montgomery, the F.H.A. commissioner, said that the program started operating on Oct. 1 but added that “it will take time for the lending community to get the program up and running.”
Earlier on Thursday, RealtyTrac, a default-tracking service, reported that foreclosure filings jumped by more than 71 percent in the third quarter, to 765,000, from the period a year earlier. There was a slight dip in filings in September, from August, but the company said that decrease was caused by new laws in some states like California and North Carolina that have delayed the start of some foreclosures. In Massachusetts, which enacted a 90-day moratorium on foreclosures three months earlier, default filings surged in September.
RealtyTrac tracks foreclosures based on court filings in 2,200 counties. Critics have said that multiple court filings on each home inflate its statistics. RealtyTrac says it adjusts its data to account for multiple filings.
At the White House, Mr. Bush’s press secretary, Dana Perino, warned that the country was in for “a rocky road” on “the employment front.” She also said the administration expects next week’s report on third-quarter gross domestic product “not to be a good one, and the next quarter could probably be tough as well.”
The remarks were significant, coming from a White House that has traditionally been reluctant to offer forecasts in advance of reports. But Ms. Perino said she was “just trying to be realistic.”
Sheryl Gay Stolberg contributed reporting.
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