At Last: Some Real Aid for Struggling Homeowners
It's small change compared to the $50 billion the feds have committed so far to the Home Affordable Modification Program, but don't be deceived. This could be the first baby step toward real help for homeowners – if the states play their cards right."This fund is going to help out-of-work homeowners avoid preventable foreclosures," the president promised a Vegas audience. "And it will help homeowners who owe more than their homes are worth find a way to pay their mortgages that works for both the borrowers and the lenders alike, and will help folks who've taken out a second mortgage modify their loans."
In the five states receiving the aid, home prices have plummeted more than 20 percent since their real estate markets' peak, leaving homeowners especially vulnerable to foreclosure. When borrowers owe more than their homes are worth, their options become limited – it's not possible to sell or refinance – and the temptation to walk away grows.
These states were also hotbeds of speculative overbuilding during the boom.
A large number of borrowers in these states, especially California, also have the home lending equivalent of herpes: a second mortgage on top of the main one, which they typically used to reduce or even eliminate the down payment. When those homeowners apply for a loan modification, even if their lender is willing to reduce the amount of principal they owe it's legally not allowed to unless the second lender either agrees to it (rarely) or disappears from the picture.
Each state's housing finance agency will devise its own plan for the money, suited to local conditions. So Michigan, with 14 percent unemployment, would do well to provide temporary aid to out-of-work homeowners. California, meanwhile, ought to do something the feds haven't been willing to until now: aim and fire at second mortgages. Once second mortgages are out of the picture, many more borrowers in these states will be able to get a loan modification, and the reduction in their debt will make it much more likely they'll hold onto their home in the long term.
Let's be honest – $1.5 billion not a lot compared to the number of homeowners in trouble in these states or what it will cost to make second mortgage investors go away. Every month in California, close to 30,000 borrowers get the first notice that they're heading toward foreclosure, and nearly 200,000 homeowners there have been okayed for Treasury's loan modification program. Treasury – not to mention Elizabeth Warren's Congressional TARP Oversight Panel -- will have to watch to make sure the states spend the money wisely.
But let's say the states get some second mortgages to disappear, homeowners get serious reductions in what they owe, and they can hold on to their homes. Let's also assume the banks that hold the second mortgages don't implode from the losses. This little experiment could finally convince all the naysayers out there, in Treasury and at the banks, that giving homeowners a real break at long last is something that's in the entire nation's best interest.