While the $700 billion federal bailout bill promises to ease the impact of the credit crunch on banks through the purchase of mortgage-backed securities, there is very little in it that addresses the plight of homeowners teetering on the brink of foreclosure.
Instead, distressed homeowners seeking relief — including many in the five boroughs — are being directed to the Hope for Homeowners Act, part of the Housing and Economic Recovery Act, which went into effect at the beginning of last month.
Under the new homeowners program, an estimated 400,000 struggling homeowners nationwide may be able to refinance their mortgages into federally insured, 30-year fixed-rate loans. Participating lenders will be required to write down the new mortgages, which will be based on 90 percent of a property’s current market value.
In return, eligible homeowners will be required to share any subsequent price appreciation with the government.
The program, which aims to insure up to $300 billion in new mortgages, offers some hope for lenders by allowing them to escape the risk and expense of having to foreclose on delinquent borrowers.
At face value, Hope for Homeowners seems like it would be a boon for both lenders and homeowners in New York City.
The number of foreclosure filings in New York City for 2008 is expected to reach between 18,000 and 20,000, according to the Center for New York City Neighborhoods, a new non-profit organization founded by the city as well as several nonprofit organizations to coordinate efforts to deal with the subprime crisis.
Housing advocates in the city who are working to stem the spread of foreclosures, however, are skeptical about whether lenders will participate in the Hope for Homeowners program.
“The real problem is that it is voluntary for lenders,” said Ismene Speliotis, executive director of the northeast regional housing offices of Association of Community Organizations for Reform Now, an affordable housing advocacy group.
“Other than the insured part, [the mortgage industry] could have already been modifying mortgages,” Speliotis said. “But we have not seen that happening. We did not see it before August 1 [before Congress passed the law] and that makes us concerned that we are not going to see it [now].”
Hope for Homeowners has the potential to cut losses substantially for lenders holding distressed mortgages or mortgage-backed securities, said Richard Nardi, a real estate law specialist and partner in the law firm Loeb & Loeb.
“It is very unusual for someone to go through foreclosure and get 90 percent of the property value,” Nardi said. “Once you go into foreclosure, the word that goes through everybody’s mind is ‘fire sale.'”
Still, some say because housing values haven’t fallen as precipitously in New York City as they have elsewhere, Hope for Homeowners has less of a chance of working in the Big Apple.
“In some places where the value has dropped by 20 or 30 percent, there is a much bigger incentive by a mortgage servicer to just go ahead and recognize that loss,” said Michael Hickey, executive director of Center for New York City Neighborhoods.
“But here in New York you still have parts of the city that have stayed flat or have dropped less than 10 percent, maybe 5 or 7 percent, so now you are going to take a 10 percent loss. If you haven’t seen that much softening, you might not go for it,” Hickey said.
Another challenge for homeowners seeking acceptance into the Hope for Homeowners program is that most of the distressed mortgages are held by real estate trusts, where the authority to grant a modification is often divided up among many different parties.
According to the Center for Responsible Lending, a national non-profit policy organization devoted to eliminating abusive lending practices, approximately 80 percent of subprime mortgages issued in the several years leading up to 2007 were securitized, whereas banks directly own only about 20 percent.
There is language in the $700 bailout bill that directs the Treasury Department to develop a plan to curb foreclosures by encouraging mortgage servicers to modify mortgages under the Hope for Homeowners program, in addition to undertaking other loan modification efforts.
However, it is unclear whether the government will actually have full control of mortgages even in the securities that it purchases. In many mortgage securitizations, mortgages were packaged into securities that were sliced into different sections and sold to different investors. If the federal government follows through on its plan to buy up distressed securities, it is likely to own only pieces of the underlying mortgages according to Ellen Harnick, senior policy counsel at the Center for Responsible Lending.
“No one investor has the right to force the modification of the securities without the consent of the other investors,” Harnick said. “The Treasury Department is going to be just like any other investor — although it may have some moral suasion.”
Even if some mechanism is established to streamline the loan modification process, Hope for Homeowners may ultimately benefit lenders more than homeowners in the parts of the five boroughs with high foreclosure rates, like Queens. According to PropertyShark, there were 665 foreclosures in Queens in the third quarter, an increase of 100 percent from the same period last year.
“I think that a smart lender would run to take part in the program so that you will take a 10 percent hit, but get out before the bottom falls out,” said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research.
According to Baker, New York City is still seriously overvalued and homeowners in depreciating neighborhoods who get a refinanced mortgage pegged to 90 percent of current market value face the prospect of living in a home that is worth less than their mortgage.
“The homeowner is the one that will get screwed,” he said. “They will get a new mortgage and two or three years later they will be 20 percent under water.”