Can Lender-Initiated Programs and FHA Reform Stave-Off the “R” Word?

To date, the current administration’s plan of attack for correcting the mortgage meltdown and credit crunch crises has been to: (1) place pressure on lenders to help borrowers refinance or setup affordable payment plans and (2) initiate programs and approve legislation (such as FHA Secure and H.R. 3648 precluding taxes on forgiven debt) to encourage borrowers to refinance. But with the continued deceleration of home values, the acceleration of defaults and foreclosures, and the decreasing supply of loan dollars, many in Congress, Federal agencies, and consumer advocacy groups are calling for stronger action. (See acorn.org; the US Comptroller of the Currency; and the Wall Street Journal, article by Michael M. Phillips and Greg IP dated 2/28/08 at http://s.wsj.net/article/SB120416823532298975.html?mod=fpa_mostpop).

According to the Wall Street Journal, representative Barney Frank (D., Mass.), chairman of the House Financial Services Committee, has proposed a plan that would provide about $10 billion in loans and grants to help states buy foreclosed homes, plus a similar sum to allow the FHA to guarantee new, more-affordable mortgages for homeowners on the brink of losing their houses. Other congressional lawmakers are pushing for something even more aggressive. Senator Chris Dodd of Connecticut wants to create something similar to the Depression-era Home Owners’ Loan Corporation, which would buy troubled mortgages from banks and investors and move borrowers into more affordable loans with government backing.

However, there appears to be one major problem with most of the more aggressive solutions proposed thus far: they all cost money to implement, lots of money. Barring some serious cuts to other federal programs, the additional $10 billion cost proposed for Mr. Frank’s above-referenced plan, for example, would likely be borne by John and Jane Taxpayer. This begs the question: will raising taxes to initiate programs aimed at curbing the aftermath of the so-called “mortgage meltdown” serve the greater welfare, or will it ultimately sink us further into a recession? In a struggling economy many economists and government officials like Treasury Secretary Henry Paulson seem to agree that raising taxes could actually accelerate a recession. (See Wall Street Journal article supra)

So what is the answer? Is it time start paying the federal government more so it can start buying-up all the “bad” loans? Or, can the administration use the resources currently available to it in order to push private lenders to solve the problem?

This writer believes that it is premature to initiate any $10 billion programs just yet. While it is important to begin brainstorming and outlining such contingency plans, it is still to soon to tell whether or not the federal government will be able to provoke banks to act in a manner sufficient to pull us out of this economic tailspin.

Right now, the FHA Secure program is only months old. Project Lifeline, a foreclosure prevention program developed by six of this country’s largest home loan servicers, has been in existence for less than a month. Just Last week the U.S. Office of the Comptroller of the Currency said it was ordering nine big banks (Wells Fargo, Chase, Bank of America, Citibank, Wachovia, National City, HSBC , First Horizon and US Bancorp) to make ongoing disclosures to the Comptroller regarding monthly defaults, foreclosures, and steps taken to prevent foreclosures. Federal Reserve Chairman, Ben Bernanke, has given recent indication that rates will be cut once again when the Fed meets on March 18th. (See article by the Associated Press dated 2/27/08 at http://www.msnbc.msn.com/id/23367821/). Further, we still have yet to see what effect the new increased conforming loan limits will have on the home lending industry.

So, it’s safe to say that some problem solving wheels are in motion. Accordingly, we should not push the panic button and call on Congress to pass the 2000s version of the New Deal just yet. Rather, we should allow the FHA, the Fed, and private lenders time to do what they have already set out to do.

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Attorney Tyler F. Belong is a partner at the San Diego law firm of Hogue & Belong. Mr. Belong is also a founder of the Mortgage Accountability Association.

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