Economy: Foreclosures Will Continue Even With New President

    The hopefulness that comes with a new president taking office can’t erase the subprime lending disaster and will not resuscitate homes values overnight — presidents have no direct ability to reduce rising mortgage rates.

Both Senators Barack Obama and John McCain promise help for homeowners facing foreclosure.

Obama calls for a broader role for government than McCain, but both candidates envision the Federal Housing Administration providing new, cheaper mortgages to distressed homeowners who otherwise would have difficulty refinancing into more secure government-insured loans with lower monthly payments.

For the plans to work, lenders would have to be willing to take a substantial loss by reducing the amount owed on the loan. Some lenders would have a powerful incentive to take the losses because a refinancing deal could allow them to recover far more money than they would get from the costly process of foreclosing on the property and trying to resell it.

The FHA piece of the Dodd plan would cost close to $1 billion and would help more people.  The funds would come from diverting money in the early years from an affordable housing fund financed by the profits of mortgage giants Fannie Mae and Freddie Mac.

McCain’s FHA provision is estimated to cost from $3 billion to $10 billion and would help less people.  The funds would come from either cutting government spending elsewhere or having the federal government borrow more.

Experts predict foreclosures will continue to climb well into 2009.  Some believe there’s a chance for improvement in late 2009, but more think that won’t happen until 2010.

Why so long before we see improvement? Because a long-term solution is tied to a turnaround in house prices.

Slumping home values are blamed for the bulk of the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth, so they walk away from their homes. Dumping more empty houses on the market adds to the pile of unsold homes, and that drives home prices down further. It’s a vicious cycle.

Experts predicted more than 2 million foreclosures are coming over the next two years, and up to 15 million homeowners will owe more than their house is worth, as house prices continue to fall.

Fifty-seven percent of Americans say housing prices are important to them personally, according to a recent AP-Yahoo News poll. For many, their home is their biggest asset. As home prices dropped, so did Americans’ net worth — leaving people feeling less financially secure and gloomier about the economy’s direction.

Which candidate would do a better job of handling housing prices? Twenty-five percent said Obama, while 17% thought McCain. Their plans:

Obama	McCain
Obama supports legislation along these lines by Sen. Chris Dodd (D-CT) which would help around 400,000 strapped homeowners. People wouldn’t have to have good credit to qualify as long as they could show they are able to afford the new payments. “If the government can bail out investment banks on Wall Street, we can extend a hand to folks who are struggling on Main Street,” Obama said.	McCain’s plan would provide relief to 200,000 to 400,000 homeowners but would be open only to people who could show they were creditworthy when they got their original loan. McCain said his plan offers “every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home.”
In addition to his FHA proposal, Obama calls for creation of a $10 billion foreclosure prevention fund that boosts counseling for distressed homeowners before they slide into foreclosure, helps people sell homes they bought but couldn’t afford and teams with state governments, community groups and lenders to make sure loans can be modified in a timely manner to avoid foreclosure or bankruptcy. His approach, which reflects the traditional Democratic preference for more government intervention, also would create a 10% mortgage credit for people who don’t itemize their taxes. That would provide 10 million homeowners, most of whom earn under $50,000 a year, with an average of $500 in savings, his campaign says. And, that should help those struggling to keep up with their mortgage payments.	McCain prefers a more limited government role in dealing with the housing crisis, consistent with traditional GOP leanings. The other component of his plan calls for the Justice Department to set up a task force to investigate possible wrongdoing in the mortgage industry. The Justice Department has been pursuing cases of fraud and other mortgage-related matters. “In some cases, lenders and borrowers alike were caught up in the speculative frenzy that has harmed the housing market,” McCain said. “And it is not the responsibility of the American public to spare them from the consequences of their own bad judgment.”
Obama also supports changing bankruptcy laws so that homeowners going through that process can renegotiate terms of their mortgages — just as people or investors who own multiple homes or vacation homes can do.	McCain Plan Summary: – To be eligible for the FHA-insured mortgages, certain borrowers who live in their homes must prove creditworthiness at the time of the original loan and that they can meet the terms of a new 30-year fixed-rate mortgage. – Separately, McCain calls for the creation of a Justice Department task force to investigate potential criminal wrongdoing in the mortgage industry.
Obama also would move to combat mortgage fraud and improve mortgage disclosure. Deficiencies in those areas contributed to lax lending that allowed people to take out home loans that their incomes couldn’t support, critics say. “This kind of transparency won’t just make our homeowners more secure, it will make our markets more stable, and keep our economy strong and competitive in the future,” Obama said.
– To be eligible for FHA help, people don’t have to have good credit to qualify as long as they can show they are able to afford the new payments. – Separately, Obama would create a 10 percent mortgage credit for people who don’t itemize their taxes.  Obama Plan Summary: – Supports changing bankruptcy laws so that homeowners going through that process can renegotiate terms of their mortgages; just as people or investors who own multiple homes or vacation homes can do. – Would take steps to combat mortgage fraud and improve mortgage disclosure.

 

Congress has been working on a broad housing rescue package that would allow the FHA to help struggling homeowners. Differences have to be worked out between Dodd’s plan, which is pending in the Senate, and a similar House-passed package by Rep. Barney Frank (D-MA) and with the White House, too. The White House has repeatedly threatened a veto but is working behind the scenes with congressional leaders to find common ground.

The rescue plans envisioned by Obama and McCain — and Congress — would deliver short-term help but aren’t a cure-all, housing experts said.

Long-term strategies are needed to prevent a repeat of the foreclosure crisis, experts said, and that must revamp the regulatory structure to improve oversight of players and borrowers in the mortgage finance system. The political debate on such a broad overhaul has already started in Washington and will likely spill over to the next president and Congress.

Paulette