Issue of the week: New help for struggling homeowners

last updated 8 January 2015

It’s back to the drawing board, said Terry Savage in the Chicago Sun-Times. The Obama administration last week rolled out a revamped program to help homeowners facing foreclosure, offering $50 billion in incentives to lenders to stretch out mortgage maturities, reduce interest rates, and lower loan principal amounts. It’s all part of an effort “to break the surge in foreclosures and the logjam in modifications.” It’s clear the administration had to do something—its Home Affordable Modification Program, launched last year, has resulted in the modification of a mere 168,000 mortgages out of more than 1.7 million eligible cases. The revised program is aimed at homeowners who owe more than their homes are worth—a condition affecting one in every four homeowners—or who have lost their jobs and fallen behind on payments. Unemployed borrowers can see their payments reduced to 31 percent of their unemployment benefit, while those drawing a reduced income can refinance into federally guaranteed mortgages and have their principal lowered. But is it fair to subsidize delinquent borrowers with the tax dollars of those who have stayed current on their mortgages?

It most certainly is not, said Lawrence Kudlow in RealClearMarkets.com. “Team Obama is rewarding reckless behavior, punishing the 90 percent of responsible homeowners who are making good on their mortgages.” Worse, the administration’s new plan offers subsidies to people making up to $186,000 annually who owe more than $700,000 on their mortgages. “This isn’t even a middle-class entitlement. It’s an upper-middle-class entitlement.” Sad but true, said Megan McArdle in TheAtlantic.com. The plan probably will provide only “minimal relief for borrowers in the worst-afflicted areas,” because the government won’t guarantee loans that exceed 115 percent of a home’s current value. That’s not much help to folks in Las Vegas and parts of Florida where housing prices have plunged 50 percent or more.

The administration never said its program would help every hard-pressed borrower, said Kevin Hall in The Sacramento Bee. It admits that it might save perhaps a third of the 12 million homes facing foreclosure in the next several years. Even so, “Republicans weren’t shy about labeling the effort another bailout.” But faced with a tsunami of foreclosures in an election year, said Stephanie Armour in USA Today, the administration was forced to act—even though some of the modified loans will still go into default, sticking taxpayers with the bill. But if all goes according to plan, many foreclosures will be delayed, which will help keep the still-fragile recovery on track. Spreading foreclosures over a longer period means home prices will decline over a longer stretch. That might not sound like the perfect solution, but it may be the best we can hope for.