Worthy foreclosure rescue?

The Philadelphia Inquirer (MCT) - The federal government's latest efforts to prevent foreclosures are getting a lukewarm response from economists, officials and advocacy groups.

Many doubt that lenders, already facing huge losses, will agree to take on more red ink to refinance troubled loans at lower interest rates.

Some housing experts also say the time limits are too short for bringing foreclosed properties back onto the market as affordable housing. And adding to a mountain of unsold existing and new homes will only make matters worse, they say.

One borrower-rescue program, called Hope for Homeowners, is designed to prevent foreclosure by giving qualified individuals the opportunity to refinance into mortgages with lenders insured by the Federal Housing Administration.

A separate program provides $4 billion to states and local authorities to buy and rehabilitate foreclosed properties and turn them into affordable housing for first-time and low- and moderate-income buyers.

The success of Hope for Homeowners, which was among the provisions of the Housing and Economic Recovery Act, signed into law July 30, depends, at least in part, on lenders' willingness to take a 10 percent loss if they allow mortgage holders to refinance, said Rick Sharga, chief economist at RealtyTrac Inc., the Irvine, Calif., firm that tracks foreclosure filings nationally.

"Lenders aren't going to take the initiative unless they are sure that 10 percent is actually the bottom for them," Sharga said, adding that if lenders agree to that figure, only to find out that their loss _ if they don't go along with the refinancing _ would be just 4 percent, they won't take the initiative.

While hoping that Hope for Homeowners does what its authors intended, broker Peter Buchsbaum, of Arlington Capital Mortgage Corp. in Abington, Pa., said the dire situation in which the country finds itself would not have arisen had lenders started working with troubled borrowers earlier.

Nine months ago, Fed Chairman Ben S. Bernanke urged lenders in high-foreclosure states to "consider lowering the mortgage-note amount to the current value of properties and lower the payments," Buchsbaum said.

They did not, he said, and people abandoned their homes in droves, flooding the market with inventory and sending values spiraling even lower _ as much as 50 percent in parts of California.

Under the economic-bailout plan Congress approved Oct. 3, lenders will sell "bad debt" to the government at a huge discount. In return, the government gets a small piece of the lenders for assuming the debt.

"Maybe we get lucky and that is so unappealing to them, they go back to Plan A from nine months ago," Buchsbaum said.

Sharga wants to know what happens when the government buys all the distressed mortgages in those Wall Street securities.

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"Will it freeze or accelerate foreclosures?" he asked, since mortgage servicers who handled the loans for investors "are out of the picture."

Unlike the July housing act, Sharga said, the bailout has little for the typical homeowner. It does, however, allow those who do not itemize on their federal income tax returns to deduct up to $1,000 in state and local property taxes.

None of the actions the federal government has taken will solve what Columbia School of Business economists R. Glenn Hubbard and Chris Mayer say they believe is the fundamental problem: fixed rates higher than they should be, to attract investors.

"The cost of buying a house is now 10 percent to 15 percent below the cost of renting across most of the country," Mayer said, yet "rising mortgage spreads and down-payment requirements are driving down housing prices."

Their solution: Refinance all mortgages on primary residences as 30-year fixed at 5.25 percent, "matching the lowest mortgage rate in the past 30 years," and place them with Fannie Mae and Freddie Mac. Investors would not qualify.

Critics say the July housing-recovery act's $4 billion Neighborhood Stabilization Program for foreclosed properties favors areas with high-foreclosure rates over those with comparatively lower rates.

Though funding allocations have been announced, most rules other than spending deadlines have not yet been written.

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© 2008, The Philadelphia Inquirer.