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Quick mortgage crisis help unlikely
Lawmakers set strategies, plan hearings but progress slow
BY JESSE J. HOLLAND The Associated Press

   WASHINGTON — Want government help to get out of a bad subprime mortgage? Don’t look for Congress to come to your rescue anytime soon.
   Lawmakers have lots of ideas and plans — as well as hearings to share their concerns and assess blame — but there’s no consensus on how to stop the foreclosures. The only thing everyone has agreed on is that something must be done.
   “We may have as many as 1 million to 3 million people who could lose their homes, not because they lost their jobs, not because the economy collapsed but because they got bad deals on mortgages,” said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee.
   House and Senate lawmakers are working on different plans to help Americans out of the mortgage crisis, none of which seem ready for a prime-time signing by President Bush. Dodd acknowledged as much last week as he urged the White House to take action, despite all the mortgage-related legislation his committee has planned for the fall.
   “Those matters will take a little more time,” Dodd said.
   Time may be running out. Financial markets in the U.S. and around the globe have been shaken by fears about spreading credit problems that started with home mortgages. It began with rising defaults in subprime mortgages — home loans made to people with weak credit histories.
   The rising delinquencies have jolted global credit markets because big hedge funds and other investors poured lots of money into risky subprime mortgages because of their higher returns and now face the prospect that they will not be repaid.
   The House and Senate are working on different tracks, but the plan furthest down the road is in the Senate, where senators will vote this month on the Transportation-Housing and Urban Development departments spending bill. Inside that bill is $100 million earmarked for nonprofi t housing groups to help homeowners with refinancing.
   Many mortgages are no longer held at banks, so people don’t know where to go when they start getting in trouble, senators said.
   “First and foremost, we need people on the ground to help innocent mortgagors, innocent homeowners refinance when they’re
on the edge of foreclosure and yet they have
the wherewithal for refinancing,” said Sen.
Charles Schumer, D-N.Y., who sits on the
Senate Banking Committee. “Somebody’s
got to fill that void.”
   While the Senate is working on that, Rep. Barney Frank, chairman of the House Financial Services Committee, will hold an inquiry Wednesday on credit rating agencies like Standard & Poor’s Corp., Moody’s Investors Service Inc. and Fitch Ratings. Such rating agencies have been criticized for not properly evaluating the risks of bonds backed by mortgages given to borrowers with weak credit.
   President Bush, meanwhile, urged Congress on Friday to concentrate on reforming the Federal Housing Administration, a Depression-era agency created to help low- and moderate-income Americans afford homes. The House passed a bill last year that would modernize the FHA, but a companion bill has yet to make it through the Senate.
   That legislation is one of Dodd’s priorities for the fall.
   “We’re looking at ways to deal with the credit rating agencies and FHA, which I had hoped we would have completed in July,” Dodd said. “We’ll hopefully bring that up as soon as we can with the return of the Congress in September.”
   However, even if it passes the Senate, it would have to be reconciled with the House legislation before it can go to the White House for Bush’s signature, a process that could take months.
   Some Democrats also would like to see mortgage giants Fannie Mae and Freddie Mac — which are recovering from accounting scandals — play a larger role in the mortgage market. Some want to see the two companies buy “jumbo” mortgages of more than $417,000 in high-cost areas of the country.
   The House in May passed legislation that would do that. But the situation has worsened since then, and the legislation must be reworked, Frank said. “The current crisis in the mortgage market demonstrates we should raise it to a higher level,” he said.
   Most of the other bills are still in planning stages, like numerous measures to regulate and penalize mortgage lenders who engage in predatory lending. Schumer acknowledged, however, that it won’t help anyone already suffering with a bad mortgage.
   “This won’t do anything about what happened in the past, but it will prevent the present crisis from getting worse because mortgage brokers are still preying on these people,” Schumer said.  

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‘Keep the Dream’ not financed by taxpayers

   I would like to set the record straight regarding the new “Keep the Dream” program mentioned in the Aug. 19 Viewpoint article by Erik Schnackenberg, entitled “Banks Gone Bad.”
   “Keep the Dream,” which was launched by the State of New York Mortgage Agency, is an innovative $100 million program designed to help homeowners at risk of foreclosure refinance their mortgages so they can keep their homes.
   The program will not be funded by taxpayer dollars. Rather, the resources will come from investors in the capital markets who invest in these mortgages through SONYMA’s partner, FannieMae — one of our most reputable government-supported housing institutions.
   Also, a portion of the $650,000 the state will use to provide homeowner counseling to recipients of “Keep the Dream” mortgages will come from internally generated SONYMA funds — not taxpayer dollars.
   It is also important to note that “Keep the Dream” is not a bailout for banks. Many of the banks that initiated inappropriate mortgages have long since sold those mortgages to investors. And the banks that still hold these mortgages would prefer that homeowners stay in their homes and make their monthly payments rather than go through New York’s arduous foreclosure procedures.
   “Keep the Dream” will provide valuable help to borrowers facing financial hardship because of higher payments due to an interest rate reset on an adjustablerate or other unconventional mortgage. It is consistent with SONYMA’s mission of providing home ownership opportunities
for working-class families throughout New
York state.
PRISCILLA ALMODOVAR
New York City
The writer is president and CEO for the State of New York Mortgage Agency.  

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Home foreclosures set a record Figures show mortgage crisis is worsening
BY MARTIN CRUTSINGER The Associated Press

   WASHINGTON — Homeowners, struggling to deal with sharp increases in their adjustable mortgage payments, got hit with a record number of foreclosure notices in the spring as the crisis in subprime lending intensified.
   The problem was the most severe in the industrial Midwest and former housing boom areas such as California and Florida, but economists warned the situation will get worse in coming months as an estimated 2 million adjustable rate mortgages taken out with low introductory interest rates reset to much higher rates.
   The crisis is most severe in subprime mortgages, loans provided to borrowers with weak credit, but it is now spreading to other types of mortgages, according to a quarterly report released Thursday by the Mortgage Bankers Association.
   That report showed the number of homeowners who got foreclosure notices in the April-June quarter hit an all-time high of 0.65 percent, up from 0.58 percent in the first three months of the year. It marked the third consecutive quarter that a new record has been set.
   The rising defaults in subprime mortgages have roiled global fi - nancial markets in recent weeks, sending stock prices on a rollercoaster ride as investors wonder which big bank or hedge fund will be the next to report huge losses from subprime mortgages that were bundled into securities and resold to investors.
   Both President Bush and Federal Reserve Chairman Ben Bernanke tried to calm fears late last week. Bernanke pledged the central bank would “act as needed” to limit any adverse economic effects from the market turmoil.
   Bush announced changes in the Federal Home Administration insured-loan program to help combat the expected wave of foreclosures and also answer attacks from Democrats that his administration has been slow to respond to a growing crisis in mortgage foreclosures.
   Democrats criticized Bush for not going far enough and vowed to push more aggressive legislation through Congress, not only to help homeowners facing foreclosure but also to attack predatory lending practices they contend led to the crisis.
   Sen. Charles Schumer, the chairman of the Joint Economic Committee, said the new mortgage delinquency numbers should serve as a wake-up call to Congress and the administration that urgent help is needed. Schumer is seeking $300 million in federal support for nonprofit mortgage counseling groups which he said were “the best defense against the coming storm of foreclosures throughout the country.”
   Private economists warned the worst slump in housing in 16 years and the turbulence in fi - nancial markets from a resulting serious credit squeeze could push the economy into a recession as more borrowers fall into default, dumping even more homes onto an already glutted market.  

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The program will not be funded by taxpayer dollars. Rather, the resources will come from investors in the capital markets who invest in these mortgages through SONYMA’s partner, FannieMae — one of our most reputable government-supported housing institutions.

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Homeowners facing foreclosure have options
BY NANCY TREJOS The Washington Post

   WASHINGTON — When Michael and Kimberly Walker wanted to buy a house three years ago, they had no money for a down payment, but that didn’t matter. They took out two loans — one for $167,000, the other for $40,000 — and ended up with a three-bedroom townhouse in Purcellville, Va.
   Having relied on an acquaintance to put together their financing, they didn’t pay much attention and were surprised to learn later that the interest rate for their first mortgage would increase after two years. The rate on that loan is now 10.8 percent but will reset to 11.8 percent in a couple of weeks. Their monthly payment for both loans is $2,058 plus taxes.
   Combined, they expect to make about $59,000 this year, he as an equipment operator for a construction materials company, she as a case-management clerk at the county’s circuit court. They have a 5-year-old son, credit card debt and two car loans. They no longer go out to dinner, buy clothing or go to movies. Still, they have not been able to pay their mortgage on time in the past six months. “It’s just adjusted to where we can’t keep control of it,” said Kimberly, 28.
   As the housing market weakens and lenders tighten their standards, people like the Walkers are struggling to figure out how to fend off foreclosure. “The answer is never easy, and it’s getting harder every day,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.
SUBPRIME LOANS
   During the real estate boom, many mortgage companies were willing to make loans — often adjustable-rate mortgages with low introductory rates that increase after two or three years — to people with spotty credit, known as subprime borrowers, or with no money for down payments.
   In the first three months of this year, the percentage of U.S. mortgages entering foreclosure was the highest since 1979, according to the Mortgage Bankers Association. Now lenders, consumer advocates and the government are trying to contain the damage. Last week, President Bush announced that the Federal Housing Administration would begin a program to allow homeowners who have good credit but can’t afford their mortgages to refinance to FHA-insured mortgages.
   Ultimately, though, it’s up to the homeowner to take charge because once the foreclosure procedure begins, it can be swift, lawyers said. “If folks sort of anticipate they are going to have trouble making mortgage payments, it’s always best to call the servicer before you fall behind,” Rheingold said. “Once you are behind, it’s going to spiral.”
   There are plenty of ways to avoid foreclosure: Refinancing, persuading the lender to modify the terms of the loan, selling the house or filing for bankruptcy protection, to name some. But there are also plenty of pitfalls, such as tax implications and longterm damage to your credit. “None of these options are great,” Rheingold said.
   So what should you do if you have one of the 2 million mortgages that are scheduled to adjust in the next two years?
   First, several consumer advocates and attorneys said, make sure you understand your loan. Surprisingly, many Americans don’t know what kind of mortgages they have, consumer advocates said. If you need help deciphering it, call a housing counselor or lawyer.
   If you have already missed payments, don’t ignore your lender. “Don’t refuse to take letters. Don’t refuse to take phone calls,” said Diane Cipollone, a lawyer at the National Fair Housing Alliance. “The sooner the homeowner contacts a counselor or attorney, the better their options are.”
LIMIT TO LENIENCY
   One thing in your favor is that lenders don’t want to foreclose, for the simple reason that it costs them money. “Banks don’t want to be in the business of owning real estate,” said Andrew Berman, associate professor of law and director of the Center for Real Estate Studies at the New York Law School.
   Their leniency only goes so far, however, and usually does not extend to the chronically late.
   “The last thing any lender needs right now is a foreclosed property, but they need to have some belief that the borrower will live up to their promise,” said Larry Pratt, president and chief executive of First Savings Mortgage in McLean, Va.
   Getting through to a decision-maker, however, might be tricky. Increasingly, mortgages are being pooled and sold to investors. So the company that gave you the loan may not be collecting the payments.
   Wanda Leys, a certified nursing assistant, learned that when an illness in her family made her miss a few payments on her four-bedroom Capitol Heights, Md., home. She has now paid what she owes and is not being threatened with foreclosure, but she said she worries because her adjustablerate mortgage will soon reset.
   She decided to reach out to her lender, but her loan had been sold from one company to another, and she couldn’t figure out whom to call.
   She sought help from the local nonprofi t group United Communities Against Poverty, which tracked down the loss-mitigation department of her new loan servicer, she said. “What they do is they call and they negotiate,” she said.
   For borrowers such as Leys, refinancing to a fixed-rate loan might be the best long-term solution. However, you can’t refinance if your property appraises for less than what you owe the bank. That is happening now in some parts of the country. On top of that, many loans made to subprime borrowers have prepayment penalties.
   And if you’ve missed mortgage payments, your credit score has most likely dropped, so you may not qualify as easily as you would have during the era of loose lending.
   “You have to look at the lending environment overall in the industry, and it’s not as easy to borrow at a low cost as it was two or three years ago,” said John Snyder, a homeownership specialist at the national nonprofit group NeighborWorks America.
   The Walkers said they tried and failed to refinance with their lender, Countrywide Home Loans, and with another bank. They are hoping for a loan modification, which would decrease the interest rate or stretch the remaining balance over a longer period, thus reducing the monthly payment. They are also trying to refinance with the Neighborhood Assistance Corporation of America, which has teamed with Citigroup and Bank of America to pledge $1 billion for people at risk of losing their homes.
‘NOBODY BENEFITS’
   Countrywide does not discuss individual cases, citing privacy concerns. In an e-mailed statement, the company said that it has 2,600 home-retention specialists and that it has kept 35,000 homeowners from foreclosure this year.
   “Nobody benefits from foreclosure,” the company said. “As we do with any customer requesting assistance, a home retention specialist is working directly with this borrower to come to a workout solution.”
   Lenders are often more likely to grant a forbearance or a repayment plan than a loan modification. A forbearance is a suspension or reduction of monthly payments until the borrower regains financial footing. With a repayment plan, the missed payments are spread out over time. The borrower has to pay them in addition to the regular mortgage.
   If none of these options works, it might be time to sell. If a borrower can’t get enough for the mortgage and closing costs, he or she might try a “short sale,” an arrangement in which the lender allows the sale of the property for less than is owed.
   A cash-strapped borrower should also think about a “deed in lieu of foreclosure,” which means giving the lender ownership rights without the shame of a foreclosure.
BANKRUPTCY OPTION
   Many counselors warn against filing for bankruptcy because it ruins the filer’s credit, albeit less so than a foreclosure. But lawyers say filing for Chapter 13 would at least halt foreclosure. But the borrower must have enough money to keep up with the regular mortgage payment and other debts.
   More help may soon be on the way. Many states have set up task forces to devise relief programs. In the meantime, if you fear falling behind on payments, seek help from one of the many nonprofit groups that focus on troubled homeowners. And beware of mortgage rescue scams.
   “The worst thing people can do is bury their heads in the sand,” said Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, a legal advocacy group in Washington.
   “The second-worst thing is dealing with people that are making promises that will make matters worse.”

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When Michael and Kimberly Walker wanted to buy a house three years ago, they had no money for a down payment, but that didn’t matter. They took out two loans — one for $167,000, the other for $40,000 — and ended up with a three-bedroom townhouse in Purcellville, Va.
   Having relied on an acquaintance to put together their financing, they didn’t pay much attention and were surprised to learn later that the interest rate for their first mortgage would increase after two years. The rate on that loan is now 10.8 percent but will reset to 11.8 percent in a couple of weeks. Their monthly payment for both loans is $2,058 plus taxes.
   Combined, they expect to make about $59,000 this year, he as an equipment operator for a construction materials company, she as a case-management clerk at the county’s circuit court. They have a 5-year-old son, credit card debt and two car loans. They no longer go out to dinner, buy clothing or go to movies. Still, they have not been able to pay their mortgage on time in the past six months. “It’s just adjusted to where we can’t keep control of it,” said Kimberly, 28.
   As the housing market weakens and lenders tighten their standards, people like the Walkers are struggling to figure out how to fend off foreclosure. “The answer is never easy, and it’s getting harder every day,” said Ira Rheingold, executive director of the National Association of Consumer Advocates

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Consumer prices in rare decline Housing industry at lowest ebb since 1995
BY MARTIN CRUTSINGER The Associated Press

   WASHINGTON — Consumer prices posted a rare decline in August while the battered housing industry saw construction fall to the slowest pace in 12 years.
   The new economic reports Wednesday were seen as justifi - cation for the Federal Reserve’s bolder-than-expected cut in interest rates to try to ward off a recession. Analysts said the waning inflation pressures gave the Fed the room to cut interest rates while the continued severe downturn in housing gave the central bank a reason to move.
   The Labor Department reported that consumer prices dipped by 0.1 percent in August. It was the first decline since a 0.4 percent drop in October 2006 and reflected a big drop in gasoline and other energy prices.
   Meanwhile, the Commerce Department reported that construction of new homes fell by 2.6 percent last month to a seasonally adjusted annual rate of 1.331 million units. That was the slowest pace since June 1995 and put construction activity 19.1 percent below the level of a year ago.
   The Fed on Tuesday cut its target for the federal funds rate, which governs the rates paid on millions of consumer and business loans, by a half-point to 4.75 percent, double the quarter-point reduction that had been expected.
   The Fed in its statement said that “some inflation risks remain,” but by making the bolder half-point cut in its federal funds rate, it was signaling that it clearly believed the threat of a recession outweighed concerns about inflation.
   Investors liked Wednesday’s benign inflation reading, believing it gave the Fed room to cut rates further. The Dow Jones industrial average rose by 76.17 points to close at 13,815.56. That gain followed a 336-point surge on Tuesday, the biggest one-day point gain in nearly five years, as investors reacted to the Fed’s rate cut.
   Analysts predicted housing construction would fall further in coming months, reflecting the recent turmoil in financial markets as investors lost their appetite for securities backed by mortgages because of rising mortgage delinquencies.
   “There is a continuing major downslide,” said David Seiders, chief economist for the National Association of Home Builders. “We know from our own surveys that August was a really rough month in the mortgage market and the housing market.”
   The organization’s survey of builder sentiment fell to 20, tying a record low set in January 1991 during the last severe housing downturn.
   Seiders said even with the Fed’s cut in interest rates he did not expect to see new home sales stop falling until early next year with construction starts not stabilizing until the middle of next year.
   The problem, he said, was that the rising mortgage foreclosures are dumping more homes on an already glutted market at a time when potential buyers are having difficulty getting mortgages because lenders are tightening standards. Mortgage foreclosures are expected to rise even further as an estimated 2 million adjustable rate mortgages with low teaser rates reset to much higher monthly payments over the next two years.
   Yale University economist Robert Shiller testified to the Joint Economic Committee on Wednesday that the current real estate downturn could end up being the most severe since the Great Depression and could drag the country into a recession.
   But other analysts said they believed that the Fed had acted in time, as long as it cuts rates further in coming months, to avert a full-blown recession.

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Mortgage foreclosures are expected to rise even further as an estimated 2 million adjustable rate mortgages with low teaser rates reset to much higher monthly payments over the next two years.

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With subprime mortgages, the American Dream went nuts
Froma Harrop
Froma Harrop is a nationally syndicated columnist.

   I had an adjustable-rate mortgage, once. I fully understood that after two years, my low come-on interest rate would be reset at a more realistic level. But when the two years passed — Powee! It was still something of a shock.
   The current mortgage crisis is about aggressive lenders, reckless borrowers and cheated investors. It’s also about psychology. The adjustable-rate mortgage has been the perfect enabler for an instant-gratification society.
   The EZ early payments let homebuyers borrow more money to buy more house than they could with a stodgy fixed-rate mortgage. Thus, they spare many the chore of saving for a solid down payment. As for the rate spike on the horizon, well, tomorrow is another day.
   The folks who made the loans grabbed quick profits by collecting big fees upfront, then dumped the risky mortgages onto securities sold to investors. The rating agencies, paid by the securities companies, bestowed their blessings on these iffy investments.
   One can sympathize with many of the borrowers now losing their homes. Some are sinking under the weight of subprime mortgages with punishing terms. Some suffered a reversal in fortune — perhaps a job loss — that dried up the cash flow needed to meet monthly payments.
   But there were also lazy borrowers who didn’t read the contract. There were magical thinkers who assumed that home values would always rise. And as always, there were greedy people who wanted a house they couldn’t afford and wanted it now.
   Stockton, California, has become a national leader in home foreclosures. It is an “affordable” exurb, 90 miles east of San Francisco. Many of the mortgages there are subprime.
   A story about a Stockton family in trouble shows a luxury kitchen that dwarfs the cooking facilities of some restaurants. Read on. The couple had bought a more modest house a few years earlier but decided to “move up” into a bigger model without waiting to sell their first home. They are now holding two mortgages and an equity loan for remodeling the newer house.
   This is the American Dream gone nuts. A big part of the sales pitch is to portray home ownership as the most superb of investments. In truth, the return on residential real estate hasn’t been all that great.
   From 1980 to 2005, money invested in the Standard and Poor’s 500 returned an average 12 percent a year, while home values even in the hot-hot markets of New York and San Francisco gained an average seven percent a year.
   Furthermore, explains Thomas Z. Lys, a business professor at Northwestern University, much of the real-estate gains represented mere inflation. And when you subtract the tons of money homeowners spend over the years on property taxes, mortgage costs, plumbing repairs and remodeled bathrooms, the return is even less.
   Sure, we can factor in the value of leveraging (you might see your house price go up after putting only 20 percent down) and that people who don’t own homes have to pay rent. But in the end, Lys concludes, the chief value of the house is ... as a place to live.
   There are sensible responses to the current mortgage crisis — and they don’t include bailing out anyone. First off, let it be a lesson to careless borrowers and investors who didn’t consider the risks they were taking. Second, the federal government should tighten up consumer protections on home loans: Do away with overly confusing or abusive mortgages. Third, everyone should stop hyping homeownership as something that every redblooded American must pursue.
   History tells us that real-estate mania will return. But let’s now enjoy a few years of thinking about our homes as homes.  

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There are sensible responses to the current mortgage crisis — and they don’t include bailing out anyone. First off, let it be a lesson to careless borrowers and investors who didn’t consider the risks they were taking. Second, the federal government should tighten up consumer protections on home loans: Do away with overly confusing or abusive mortgages. Third, everyone should stop hyping homeownership as something that every redblooded American must pursue.
  History tells us that real-estate mania will return. But let’s now enjoy a few years of thinking about our homes as homes.

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August new home sales tumble
Median prices fall by 7.5 percent to 7-year low
BY JEANNINE AVERSA The Associated Press

   WASHINGTON — New-homes sales tumbled in August to the lowest level in seven years, a stark sign that the credit crunch is aggravating an already painful housing slump.
   Sales of new homes dropped 8.3 percent in August from July, the Commerce Department reported Thursday, driving down sales to a seasonally adjusted annual rate of 795,000. That was the lowest level since June 2000.
   “This is just hideous,” said Ian Shepherdson, chief economist at High Frequency Economics.
   The home sales report came on the same day that the government reported a relatively brisk business growth rate in revised figures for the second quarter. But the 3.8 percent pace was less than previously estimated and it occurred before the credit crisis and its repercussions across the broad spectrum of the economy had taken hold.
   Home prices tanked.
   The median sales price in August fell by 7.5 percent from a year earlier to $225,700. That was the biggest drop in percentage terms in nearly 37 years. The median price is the middle point at which half sell for more and half for less. The average sales price dropped by 8 percent in August from a year earlier to $292,000. That was the biggest decline in 17 years.
   Sales fell in the South and the West in August compared with July. Sales, however, rose in the Northeast and Midwest.
   The new-homes sales report, combined with other recent economic reports showing a sharp drop in demand for big-ticket manufactured goods in August, suggested the economy lost momentum as it headed into the fall.
   On Wall Street, though, stocks rose. The Dow Jones industrial average gained 34.79 points to close at 13,912.94. Investors found a silver lining in the weak home-sales report. They believed it would increase the odds of a rate cut by the Federal Reserve next month, and thus investors bid stock prices higher.
   Another report issued by Commerce showed the economy staged a rebound in the spring before a credit crisis raised new fears about longer-term business health.
   The economy’s 3.8 percent growth rate in the April-to-June quarter was the strongest showing in just over a year. The new reading was slightly less robust than a previous estimate of a 4 percent growth rate. Nonetheless, it still marked a substantial improvement over the feeble 0.6 percent growth rate registered in the prior quarter.
   Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country’s economic health.
   The increase in the rate of growth, though, is likely to be fleeting. The deepening housing slump and a painful credit crunch since the spring have darkened the mood of individuals and businesses alike. That has led analysts to predict that economic growth has slowed considerably in the quarter that ends Sunday.
   The weakness in housing points “to yet another hefty drag on GDP growth … during the third quarter and it shows no signs of letting up anytime soon,” said Michael Gregory, managing director and senior economist at BMO Capital Markets Economics.
   The National Association for Business Economics believes growth in the third quarter — the period from July through September — slowed to a pace of around 2.4 percent. It predicts the growth rate in the final three months of this year will be around 2.5 percent. Others think growth will turn out to be weaker than those projections.
   Fears that the troubled housing market and credit problems could short-circuit the six-year-old economic expansion have shaken Wall Street. The biggest worry is that people and businesses will cut back on their spending and investment, throwing the economy into a tailspin.