During the Office of Thrift Supervision's National Housing Forum on Monday, U.S. Treasury Secretary Henry Paulson took the nation's foreclosure problem head-on, outlining plans and objectives intended to ameliorate the issue. Hillary Clinton then laid down a head-butt of her own.
‘When home foreclosures spike, the damage is not limited only to those who lose their homes. Homes in foreclosure can pose costs for whole neighborhoods, as crime goes up and property values decline,’ Paulson said. ‘Avoiding preventable foreclosures, then, is in the interest of all homeowners.’
He went on to explain that the Treasury is pursuing and implementing a three-point plan.
‘First, we are increasing efforts to reach able homeowners who are struggling with their mortgages,’ Paulson said. ‘Second, we are working to increase the availability of affordable mortgage solutions for these borrowers. Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages.’
The first element of the three-point plan – borrower outreach – is a relatively simple concept that the mortgage servicing industry routinely applies. Even before the meltdown in the subprime market, diligent efforts to contact delinquent borrowers were commonplace within servicers' loss mitigation programs.
The second and third elements, while fundamentally sound propositions, are a bit more complicated and less likely to quickly gain traction. Making new mortgage products available to borrowers facing heavy adjustable-rate mortgage (ARM) resets in a super-tight credit market is no small feat.
However, Paulson noted that the Treasury has proposed to allow state and local governments to temporarily expand tax-exempt bond programs to include refinancings. ‘If enacted, this will reduce the cost of innovative mortgage programs and allow these programs to reach more struggling homeowners,’ he said, adding that HUD's FHASecure program also helps homeowners avoid foreclosure through refinancings.
Looking down the barrel into 2008, Paulson acknowledged that ARM resets will continue to be a major issue, necessitating that servicers and investors work in concert to develop and implement more robust mortgage-modification strategies.
‘To speed up the modification process, the Treasury is working through the HOPE NOW alliance with the American Securitization Forum to convene servicers and investors so they can develop categories of borrowers eligible for appropriate modifications and refinancings,’ Paulson said.
‘I am confident they will finalize these standards soon. And I expect all servicers will implement them quickly and create benchmarks to measure their progress along the way,’ he added. ‘As a result, what was a fragmented, cumbersome process can be a coordinated effort which more quickly helps able homeowners.’
Presidential candidate Clinton – the first national figure to publicly address the Treasury's plans – responded to Paulson in a letter, noting that she was ‘encouraged by news accounts that Treasury officials are negotiating an agreement with the mortgage industry to curb the foreclosure crisis.’
Clinton, however, upped the ante. ‘If you produce an inadequate agreement, or fail outright, the cost to our economy will be incalculable,’ she remarked.
Thus, the Democratic senator from New York outlined a few added expectations: a 90-day foreclosure moratorium on subprime, owner-occupied homes; a freeze on the rates of subprime ARMs that would last at least five years or until the mortgages are shifted to affordable, fixed-rate loans; and a requirement for the mortgage industry to provide ‘status reports’ on the number of mortgages it has modified.
‘If you produce an agreement that lacks these provisions, I will pursue another course to end the crisis,’ she wrote. ‘I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors.’
On one hand, the Treasury's plans will most likely proceed at the speed of government: almost invariably slow. On the other hand, it is possible that Clinton is paying the foreclosure issue political lip service. After all, the states hit hardest by foreclosure – California, Michigan, Florida, Ohio and others – are also some of the most critical states in next year's general election.
– Michael Bates, Servicing Management