Expanded mortgage aid program should cut foreclosures

WASHINGTON – March 29, 2010 – The Obama administration’s revamped mortgage program may help more borrowers keep their homes, but economists say it could also delay foreclosures that can’t be prevented.

The program requires lenders to reduce mortgage payments for three to six months for unemployed homeowners. It also encourages mortgage servicers to consider reducing principal for borrowers who stay current on their loans.

In addition, some homeowners who owe more than their homes are worth may be able to refinance into loans backed by the Federal Housing Administration. The changes are designed to offer help to more borrowers than are getting aid under the existing program. But unemployed homeowners, for example, could still find themselves facing foreclosure if they remain unemployed when their forbearance period runs out.

“In six months, the lender will still have a non-performing loan and the borrower will still have a loan they can’t pay,” says Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center, which does audits for lenders. “Foreclosures are still going to rise.”

About 2.8 million households received a foreclosure notice in 2009, and the number is projected to top 3 million this year, according to RealtyTrac. Close to 4.5 million first mortgage loans are in the foreclosure process or are at least 90 days delinquent.

But there is an upside. By spreading foreclosures over a longer period, home prices decline over a longer stretch, says Mark Zandi, at Moody’s Economy.com.

If a flood of foreclosures hit at once, prices would drop more drastically. Without changes to the government’s program, only an estimated 500,000 foreclosures would be avoided.

Zandi estimates that the changes could spare between 1 million and 1.5 million homeowners from foreclosure. Other economists agree that the Home Affordable Modification Program (HAMP) delays some foreclosures, but that’s not necessarily a bad policy.

“What policymakers are doing is telling lenders they have to look at every loan through the lens of HAMP, and all that does is buy us time,” say Ajay Rajadhyaksha, head of U.S. fixed income strategy at Barclays Capital. “It’s probably the right policy perspective ... the price drop is less.”

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