naked capitalism

We wrote last year that some states were getting into the “save the homeowner” act. While states and municipalities are in theory in a much better position to implement this sort of program, their efforts as of our last sighting (November) had yielded little in the way of results. Nevertheless, the proponents hoped that the limited impact was due to the programs being new rather than ineffective. As we noted then:

Some state governments have implemented programs to rescue mortgage borrowers in danger of losing their homes. Eight states have committed a total of $900 million to these plans, but a Boston Globe article reports that the uptake has been very low, with only 100 families getting refinancings. If you assume an average mortgage of $300,000, that represents only 3% of the allotted amount. The experience of the states does not bode well for other refinancing initiatives.

What happened? Borrowers are believed to be desperate for any remedy other than foreclosure. Yet Massachusetts, which has the largest program ($250 million) has not refinanced a single mortgages. It isn’t alone in failing to make headway:

In Maryland, the first state to create a refinancing program, officials have found it so ineffective that they are considering shutting it down. The program has made just nine loans in about a year….. Ohio initially expected to serve one of every three applicants; officials say they have so far helped one in 15.

The intent of most of these is to catch borrowers who are likely to default when their loans reset. This construct has two main flaws. First, comparatively few borrowers fit the profile that the various states wrote into their initiatives. Second, lenders are often unwilling to write the mortgage down if the mortgage balance is higher than the market value of the house.

An article today in the Washington Post provides an update. Despite increased efforts, the non-federal initiatives are still inconsequntial, with the number benefitting trivial relative to the magnitude of defaults and foreclosures. And remember that ballyhooed agreeement with four mortgage servicers announced by California Guvernator Arnold Schwarzenegger, in which they’d freeze teaser rates for certain borrowers for five years? You haven’t heard much since then, with good reason. The servicers aren’t making the mods.

The new wrinkle is that various local entities are throwing sand in the gears, either blocking or delaying foreclosures. But that is no remedy. If lenders were wiling to write down mortgage balances, they could slow the timetable on their own to effect a workout.

If a borrower can’t afford to make payments, attenuating the process is the worst of all worlds. It keeps the homeowner from moving on, encouraging him to throw good money after bad, and by reducing the lender’s rights, it deters new sources of funding from entering the market. And with borrowers increasingly walking from properties with negative equity, this approach is likely to prove ineffective. Indeed, the evidence is increasingly that lenders, overwhelmed by defaults, are dragging their feet on foreclosures to defer the costs of the legal action and the property maintenance costs. So the solutions often presuppose a fact set different from the dynamic at work.

From the Post:

This month alone, Philadelphia’s sheriff delayed foreclosure auctions of 759 homes at the city council’s urging. Maryland extended the time it takes to complete a foreclosure. State leaders in Ohio recruited more than 1,000 lawyers to aid distressed borrowers….

Nine states have committed more than $450 million to “loan funds” aimed at refinancing the mortgages of at-risk borrowers, according to a study by the Pew Charitable Trusts….

Some states responded by creating loan funds they could use to refinance the most distressed borrowers. Pennsylvania created two new funds in November to cope with the recent mortgage problems…

Pennsylvania has refinanced 40 loans and negotiated principal reductions for an additional 38 under the two programs since they were adopted in November, said Brian Hudson, executive director of the state’s Housing Finance Agency. In most cases, lenders have agreed to cut the principal by 15 to 30 percent.

“That is not a bad effort” for a few months of activity, Hudson said.

But loan funds have financial constraints. These funds can help only a limited number of borrowers, and even then they tend to have the greatest impact in states such as Pennsylvania that have not been overwhelmed by foreclosures.

They are less effective in previously overheated markets — such as California, Florida and Nevada — where borrowers grossly overpaid for their homes and now owe far more than their homes are worth, said Michael Collins of the PolicyLab Consulting Group, a mortgage research firm based in Ithaca, N.Y.

Through their own programs, New York has refinanced only three borrowers since September, and Massachusetts has refinanced 12 since July. These two loan refinancing initiatives do not help borrowers whose mortgages exceed the value of their homes.

“Once people are in that situation, there’s not much that any state or local program can do unless the lenders make concessions,” Collins said.

A few governors tried pushing lenders to do just that. California’s Arnold Schwarzenegger attracted national attention in November when he announced that some of the state’s largest lenders had voluntarily agreed to temporarily freeze interest rates on some adjustable loans.

The results have disappointed consumer advocates. The number of loan modifications, which could involve changing either the principal or interest rate of the mortgage, declined 30 percent from November to January while foreclosures climbed, said Paul Leonard, director of the Center for Responsible Lending’s California office….

For troubled borrowers in California, foreclosure remains the most common outcome, the California Reinvestment Coalition found after it surveyed 38 counseling firms in December that worked with 8,000 borrowers. Even some of the lenders that pledged to work with Schwarzenegger did not come through for borrowers, according to the coalition…..

While the proposals wind their way through Congress, foreclosures keep mounting and local policymakers keep churning out ideas. An increasingly popular strategy is revamping the foreclosure laws in favor of borrowers.

Maryland has extended the timetable for foreclosure from 15 days to 150. Massachusetts has arranged temporary reprieves for more than 600 homeowners over the past year. Philadelphia is setting up a program that allows borrowers to get financial and legal counseling before auctions of their property are scheduled. The Ohio Supreme Court approved a mediation program in January.

Under the Ohio initiative, lenders who want to foreclose must first try to work out payments with homeowners. Only then will courts turn over the documents that companies need to sell the homes.

“That gives us leverage,” said Richard Cordray, Ohio’s treasurer. “To get what they need from our courts, they have to sit down and go through a mediation process as in all other civil cases. It slows down the process and gets everyone to the table.”…..

“I’m not at all pessimistic that we’ll make a real dent in this problem,” said Cordray, who took office a year ago. “It’s just that we’ve got many bad loans to work through.”