Will foreclosures be stopped?

The U.S. Department of the Treasury on March 4 announced aspects of the “Making Home Affordable Program,” the much-heralded plan of the Obama administration to stem home mortgage foreclosures. The plan’s guidelines were pursuant to the Economic Stabilization Act which created the Troubled Assets Relief Program (TARP), wherein the Treasury secretary was mandated to create a program for loan modifications to help homeowners avoid foreclosure.

Relief is desperately needed so that people can remain in their homes. More than 1 in 11 homeowners in the U.S. are currently in default on their loans. More than 3 million foreclosures occurred in the U.S. last year. Many adjustable rate mortgages—a usurious lever used in racist, sexist subprime loans—are due to reset to higher interest levels in April. It has been projected that 2009 will be the worst year since the crisis began in the number of people losing their homes to foreclosure.

Millions of homeowners and residents facing foreclosure and eviction are hoping and expecting that the Obama-Treasury plan will afford them relief so they can stay in their homes.

However, according to Detroit attorney Jerry Goldberg, who fights foreclosures and evictions on behalf of homeowners and renters, “The plan must be seriously amended in order to be truly effective and not be just another announcement that generates false expectations, like the Hope for Home Ownership plan initiated July 30, 2008, which has afforded relief to only 25 homeowners rather than the 400,000 initially projected by the federal government.”

Goldberg is helping the Michigan-based Moratorium NOW! Coalition to Stop Foreclosures and Evictions and the national Bail Out the People Movement in launching a petition campaign to demand the Treasury Department modify the plan to help homeowners in a meaningful way and place a moratorium on foreclosures to allow the plan to work.

Goldberg has studied the Treasury plan and he spoke to Workers World about the severe defects it currently has.

Workers World: Describe the main details of the plan.

JG: The bill has two sections to it. One is for home refinancing for individuals who are current in their mortgage loans and have been current for the past 12 months. It applies only to Fannie Mae- and Freddie Mac-backed loans. It provides for reduction of principal on an extremely limited basis: the value of a loan has to be within 105 percent of the current value of the property. But with the current dramatic decline in home values, this 105 percent loan-to-value limit cuts out virtually every homeowner from potential refinancing based on a reduction in principal.

It is the financial institutions that were responsible for the housing price bubble with their inflated appraisals and fraudulent lending practices. The lenders are often paid for the full value of these inflated notes either through the Federal Housing Administration, Fannie Mae, Freddie Mac, private mortgage insurance or “forced insurance” on vacated homes.

The program needs to provide for refinancing of homes at their current net values so that homeowners can remain in their homes and to stabilize communities and property values. The refinancing must apply across-the-board to every bank and financial institution receiving federal funds of any kind. This would also be consistent with section 1403 of the Housing and Economic Recovery Act, which mandates loan modifications and workout plans where the net value is greater than the value of the home under foreclosure.

WW: What is the second part of the plan?

JG: The second part of the bill deals with loan modifications. The biggest question is to whom it will apply. In the most optimistic view, it appears it will apply to any loan servicer for a lender that receives Financial Stability Funds (TARP funds) moving forward, that is, from this day on. It also applies to other servicers and lenders that voluntarily choose to enter the program. But experience with voluntary plans has been disastrous.

Considering that already hundreds of banks and financial institutions have received TARP funds, the plan doesn’t seem to mandate institutions that have already received the funds to carry out modifications—a huge loophole that lets the banks off the hook after receiving literally trillions of dollars in workers’ tax money.

The plan must be modified to be mandatory for any financial institution that receives or received tax dollars. The law mandating the Treasury secretary to formulate modifications was contained in the original TARP bill, 12 USC 5219, and thus the financial institutions were on notice of their required compliance with the Treasury guidelines for loan modifications when they each received their billions in bailout funds.

WW: Does the plan as it was announced help anyone?

JG: The modifications for those servicers and lenders that subscribe to the plan could potentially provide fairly significant modifications in that monthly payments will be required to be no more than 31 percent of gross income and includes taxes and insurance on the home. The lenders are required to reduce the interest rate to as low as 2 percent to achieve this figure.

But the issue is implementation. And which banks are going to voluntarily abide by it? The government will not be doing the modifications; they will be done through the servicers and they are not set up to carry out a program like this. The onus is put on the borrower to pursue it, but experience has shown how difficult it is to even get through to a lender or servicer. Right now there is no mechanism in place to even handle the volume of calls from borrowers.

WW: What should the plan include?

JG: If the Obama administration were really serious, wouldn’t the first step be a moratorium on foreclosures to give the plan a chance to be effectuated and tested? And wouldn’t it be mandatory for lenders?

It is illegal and unconscionable that individuals will continue losing their homes because lending institutions ignore federal mandates to modify their loans and refinance their homes. Without such a moratorium homeowners continue to be at the mercy of the predatory and unscrupulous financial institutions that have caused the foreclosure epidemic and the subsequent economic catastrophe.

The plan should also factor in a homeowner’s expenses in maintaining a home by including the monthly costs of heat, electricity, water and other utilities. The goal should be to keep people in their homes with mortgages and costs that are affordable given an individual’s income.

The plan strengthens the argument for a moratorium—that until the plan is more fully developed and it’s tested, there should be a moratorium on foreclosures in effect. We need to continue to demand the moratorium and demand the Treasury Department hold public hearings on the plan and change it in order to truly stop the millions of foreclosures still on the horizon.