Aid to Homeowners May Double Under Bush-Backed Loan Initiative

By Rebecca Christie and Margaret Chadbourn

Dec. 22 (Bloomberg) -- The mortgage-industry effort to stem foreclosures aims to double the number of borrowers getting help next year, as Democrats call for using taxpayer money to address the crisis.

The Hope Now Alliance, a group created at the behest of Treasury Secretary Henry Paulson last year, expects to modify about 2 million mortgages next year, according to a report to be released today in Washington. The group, which includes JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., also plans a new campaign to boost participation in the program.

Democrats have repeatedly dismissed the effectiveness of Hope Now, the Bush administration’s main initiative on mortgages. Top finance lawmakers plan legislation early next month that would deploy the second half of the government’s $700 billion bank-bailout fund to stem foreclosures.

Voluntary modifications by mortgage lenders are “too little, too late,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. As mounting job losses cause foreclosure rates to rise, “we clearly need a more activist government intervention,” he said.

Hope Now projects 950,000 loan modifications for 2008, including 208,000 for the month of November. Including repayment plans and other assistance, the group estimates that about 2.2 million foreclosures will have been prevented this year, bringing to 3 million the total averted since the program began in 2007.

‘Buck Up’

“We have to buck up and be smarter and faster and more effective going forward because the problem hasn’t gone away,” Faith Schwartz, the alliance’s director, said in a telephone interview.

Hope Now, which also includes Fannie Mae, Freddie Mac and securities and banking industry lobbying groups, is scheduled to release its report at 10 a.m. in Washington.

The Hope Now programs are voluntary and privately funded. Critics say they don’t go far enough to stem the housing crisis, which has mushroomed into a broader wave of economic distress. The U.S. economy may shrink more than 6 percent in the last three months of this year, the worst performance in a quarter century, private forecasters are projecting.

“We’re in a crisis now -- how many people’s homes will be foreclosed?” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said in a Dec. 19 interview.

Frank said he’s drafting legislation with Senate Banking Committee Chairman Christopher Dodd that would release the remaining $350 billion of the financial-rescue fund in exchange for foreclosure help.

TARP Request

Paulson exhausted the first half of the fund, known as the Troubled Asset Relief Program, last week with $13.4 billion of loans to prevent General Motors Corp. and Chrysler LLC from collapsing in coming weeks. The Treasury used most of the rest for injecting capital into banks, after abandoning an original plan to purchase mortgages and related securities.

Frank and Dodd want an agreement with Paulson and President-elect Barack Obama’s team on how to use the next half of TARP. “Why wait three weeks” until Obama takes office, Frank said. “Let’s do it.”

The Democratic plan includes provisions to hold banks accountable for stepped-up lending to consumers.

Paulson last week urged Congress to release the next $350 billion. A Treasury official said he expected talks to start soon between the administration, lawmakers and Obama transition officials on the matter.

New Initiatives

The proposal by Frank incorporates a number of different ideas for using taxpayer funds.

The legislation will include Federal Deposit Insurance Corp. Chairman Sheila Bair’s foreclosure-prevention plan, which provides a U.S. guarantee for troubled mortgages to spur loan modifications, Frank said. Bair says using $24 billion from TARP for the effort might prevent 1.5 million foreclosures.

Frank also wants to revise the Hope for Homeowners program. That initiative, run by the Federal Housing Administration and begun in July, intends to aid 400,000 homeowners by insuring as much as $300 billion in refinanced mortgages after servicers forgive part of the balance. Few lenders have signed up because of the fees and portion of loans that must be written down.

A Paulson proposal to drive down mortgage rates through new securities would also be incorporated. The program would use Fannie and Freddie, the federally chartered mortgage financiers the government seized in September, to reduce 30-year, fixed rates for new loans to about 4.5 percent from an average of about 5.54 percent.

Agency Purchases

The Federal Reserve and Treasury are already purchasing mortgage-backed securities from Fannie and Freddie in an effort to shore up lending. The Fed has bought $13.4 billion of so- called agency debt through a program started three weeks ago, which has had some impact on borrowing costs.

The yield gap between Fannie’s two-year debt and two-year Treasuries, which can affect the mortgage rates consumers pay, narrowed Dec. 19 to 0.55 percentage point, the smallest since Sept. 12, compared with a record 1.82 percentage point on Nov. 20, data compiled by Bloomberg show.

To access the rest of TARP, Paulson has to report to Congress on how the funds would be used. Lawmakers then have 15 days to pass legislation blocking the money. The president could then veto the congressional vote, forcing lawmakers to come up with a bigger majority to prevent the disbursement.

The Hope Now Alliance will continue its work whether or not the government commits money to a homeowner-assistance program, Steve Bartlett, president of the Financial Services Roundtable, a Washington-based industry group, said in an interview.

‘More Money’

“Prior to this, the Treasury has not chosen to do that,” Bartlett said. “If they do it, we’ll be able to get more modifications, because there’s more money to go around.”

Hope Now is using a mixture of lower interest rates, loan extensions and principal deferments to help borrowers stay in their homes. In some cases, lenders also may take principal writedowns to reflect lower home values.

Some studies say loan-modification efforts aren’t very effective because many homeowners fall back into default. A report released last week from the Association of Consumer Bankruptcy Attorneys said lender-driven programs are “flopping” by putting some borrowers further into debt.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac Inc., the Irvine, California-based provider of default data, reported last month.

Outreach Efforts

Next year, Hope Now aims to reach twice as many troubled homeowners through workshops held around the country, which this year drew about 20,000 people. The group plans to increase publicity for its Web site and telephone hotline, 1-888-955-HOPE, while also backing efforts that would allow borrowers to seek loan modifications before their mortgage is formally in default.

“We think we’ll be able to modify every single mortgage where the person has sufficient income to pay a mortgage that reflects the value of their home,” Bartlett said.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.