Chicago community development group says Obama mortgage plan on target

Feb. 26, 2009 – Credit experts active in LISC Chicago’s New Communities Program Foreclosure Response Fund say they’re optimistic President Barack Obama’s plan for modifying bad mortgages will begin to cure Chicago’s alarming epidemic of home foreclosures.

They do have one regret:  Something like this plan should have been implemented two or three years ago.

“If we had done this two years ago we might have avoided a lot of the economic damage and job losses we’re seeing now,” said Jim Capraro, who has led the fight against predatory lending as executive director of the Greater Southwest Development Corp. “No mortgage modification works once the homeowner loses his job and has no income.”

Both Capraro and John Groene, associate director of Neighborhood Housing Services of  Chicago, agreed the Obama plan has two highly desirable features: 1) it waives existing rules to allow homeowners-especially owners current on payments-to refinance at today’s lower rates even though they’ve built up zero on-paper equity because of falling home prices; and 2) it provides a series of incentives to lenders so they’ll negotiate monthly payments down to 31 percent of income… the historic level above which borrowers run into trouble.

“This is the level that has worked for the last 30 years and if they [sub-prime lenders] had stuck with it over the last five years, we wouldn’t be in this mess,” said Groene, who advises the many NHS mortgage counselors working in NCP neighborhoods.

President Obama outlined the basics of his program on Feb. 18 in Mesa, Ariz., a foreclosure hotspot. Full details were to be released at the program’s start-up on March 4.

Download the details

As with so much about home mortgages, the program’s specifics are relatively complex.

A four-page executive summary can be downloaded at: http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/ExecutiveSummary.pdf

A more detailed eight-page summary is at: http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/FactSheet.pdf

In general, however, the $275 million Homeowner Affordability and Stability Act has three components.

The first will help homeowners still current on payments, but who are paying high interest rates on federally “conforming” mortgages and cannot refinance because they do not have enough equity in their homes. Families seeking help in NCP neighborhoods often are already in arrears and would not be helped by this provision, but there are at least 5 million Americans who will fall behind in the months ahead unless they can refinance at today’s lower rates.

Doing so had been difficult given a Fannie Mae rule requiring borrowers to make a substantial down-payment – most often obtained by using the appreciation in a home’s value, or owner’s equity,  accrued under the previous mortgage.

A second component would assist about 4 million people who, like many NCP help-seekers, are already behind and at risk of losing their homes. It provides incentives to lenders to make loans more affordable. Specifically, if a lender or their hired servicing agent renegotiates monthly payments down to 38 percent of a borrower’s income, the federal government will pick up half the cost of lowering those payments down to just 31 percent.

In addition, the government will pay servicers $1,000 for making the effort, and a like amount for three years thereafter if the borrower stays current. After five years, however, the terms head back to the original.

A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.

NCPers react

Besides luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce monthly payments.

These so-called “cram-downs” are a reform long-sought by Sen. Richard Durbin (D-Ill.). At a recent congressional hearing Durbin said he was alarmed at the pattern of foreclosures displayed on dot maps of the Southwest Side prepared by NCP partner Southwest Organizing Project.

“We’re headed into a situation where we’re averaging five boarded-up buildings on every block,” said Capraro. A national authority on neighborhood credit issues, he participated in an explanatory conference call held by the White House following Obama’s announcement. Capraro said the write-down to 31 percent of income would have been enormously useful two years ago … but now his neighborhood’s biggest mortgage problem is job loss.

“It’s the perfect storm,” he said. “In the movie it was a northeaster meeting a hurricane. Here it’s predatory lending meeting a severe recession with huge layoffs.”

NHS’s Groene said the best part of the Obama plan is its potential to motivate lenders – including distant investors in collateralized mortgage bonds – to come forward and contact borrowers instead of playing hard-to-reach.

By working with the program they can recapture their principal and most of the originally-promised interest. With foreclosure they’re lucky to recapture 50 percent of what’s owed, said Groene, with losses of 75 percent becoming common as the housing market deteriorates.

Groene said the core work of the NCP Foreclosure Response Fund – reaching out to troubled borrowers and getting them to counselors for help – will be more important than ever. “With the lenders now coming to the table, there’s a role for all of our partners in this. We can make a difference.”

NHS Foreclosure Prevention Hotline: 1-773-329-4185