Foreclosure Relief Gets Short Shrift
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Talk about burying the lead. During his speech yesterday to reset priorities on the $700 billion bailout plan, Treasury Secretary Henry Paulson emphasized that he would provide capital infusions to banks, other financial institutions, and support the market for student loans, credit cards, and auto loans. That's what led the news stories on his speech.
A few paragraphs later we found out that the Treasury had abandoned its plan to buy bad mortgage-backed securities. The original goal of the bailout plan was to buy those securities and try to help homeowners by adjusting the underlying mortgages. He did say that the Department was looking for other ways to meet its commitment to assist borrowers facing foreclosure.
One has to wonder, though, given all the recent demands on the Treasury's money, whether there will be any money left over to help fix the housing market. Already, about $250 billion has been allocated to the banks. The Treasury used a separate credit facility to come to the aid of AIG, the insurance company. Democrats in Congress have been asking that some of the money go to bail out the automotive industry.
Paulson didn't get specific about what Treasury might do on the foreclosure front, which is where the housing industry has most at stake. Foreclosure sales continue to drive down the value of new and existing homes, putting homeowners underwater on their mortgages and builders on new home sales. Sen. Christopher Dodd, D-Conn., issued a statement calling for "robust" and "aggressive" action to stem a foreclosure tide, which he said is "critical to put our economy back on track."
Some help should come from a streamlined mortgage modification plan announced the day before by the regulator of Fannie Mae and Freddie Mac. The idea is to revise mortgage terms so that delinquent borrowers wind up paying no more than 38 percent of their gross household monthly income for housing. That would be accomplished by changing the interest rate, loan maturity date, and a variety of other means.
The other fix that's apparently still under consideration is using a portion of the rescue package, $50 billion reportedly, to guarantee some of the restructured mortages. That was the plan put forward several weeks ago by Sheila Blair, chairman of the Federal Deposit Insurance Corporation. The specifics are still being debated between agencies.
Meanwhile, companies are issuing conflicting data on the foreclosure situation. One source, foreclosureS.com, recently reported that the rate of foreclosure and short sales has declined for the last two months, indicating that efforts to curtail foreclosures may be working. Some states have enacted moratoriums, requiring lenders to give homeowners more time to work out their financial troubles before beginning foreclosure proceedings. And several large banks have agreed to re-work mortgages that people otherwise couldn't pay.
But data from RealtyTrac indicate that foreclosures continue to rise. The organization tracks a variety of steps in the foreclosure process, from default notices, to auction notices, to bank repossessions (REOs). REOs rose 4 percent in October, and they are up 58 percent from a year ago. Las Vegas has quickly become the poster-child for foreclosure sales. It had the highest foreclosure rate among the nation's largest metropolitan areas--1.6 percent of homes there received a foreclosure filing last month.
Home builders have an enormous stake in the debate over foreclosure assistance. The downward pricing spiral created by rising foreclosure sales, coupled with the other financial pressures bearing down on builders, is strong enough in some markets to pull companies under.