For the third time in four months, the Treasury Department has announced a plan ("Project Lifeline") to encourage the lending industry to do more to prevent an alarming level of foreclosures. The Department's proposals underscore the serious economic damage triggered by reckless lending in the subprime market, which has produced the worst housing decline since the Great Depression.
We at the Center for Responsible Lending welcome any help for homeowners struggling with unaffordable loans, including this announcement, but we are concerned that Project Lifeline comes with a rope that is too short. The centerpiece of the plan is a "pause" that would temporarily halt foreclosure proceedings for some borrowers, but only for 30 days. This is a small step that isn't likely to make a significant difference for the hundreds of thousands of homeowners who are at risk of losing their home.
Recent data from mortgage servicers participating in the Treasury initiative show that distressed loans receiving meaningful fixes continue to be dwarfed by the rising number of foreclosures. During the fourth quarter of 2007, mortgage servicers modified 141,000 distressed loans, but they started foreclosures on 458,000. That means that foreclosures are outnumbering loan modifications by three to one. Further, we don't know how many of these modifications created sustainable loans, and how many did not reduce unaffordable payments and therefore only delayed foreclosure for a short period of time.
A report issued by Standard & Poor's indicates that loan servicing staff is overwhelmed by the sheer magnitude of rising foreclosures. For example, the report shows that the average number of foreclosure files handled by loan servicing employees is nearly 400 [1] -a "case load" that virtually guarantees many homeowners will not receive the information or assistance required to save their homes.
In short, voluntary foreclosure prevention isn't working.[2] We applaud Secretary Paulson's goal to "help as many able homeowners as possible keep their home," [3] but achieving this will require moving beyond industry volunteerism to sensible public policies. Congress is now actively considering legislation that would remove obstacles to fixing distressed home loans. Our representatives need to quickly pass this proposal, which would allow courts to supervise loan changes as a last resort for struggling homeowners.
[1] Standard & Poor's, "Servicer Evaluation Spotlight Report," (January 2008), p. 28.
[2] For example, during the first eight months of 2007, Moody's Investors Service found that lenders only modified 3.5% of subprime loans resetting to higher interest rates.
[3] Cho and Irwin, "Paulson Outlines Mortgage Aid Plan," Washington Post (December 4, 2007).
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.