Rescue bill won't curb region's foreclosures, experts say

The provisions for struggling homeowners in the Wall Street rescue bill signed into law Friday are largely voluntary and not enough to curb foreclosures in regions such as Sacramento, some analysts say.
The bill authorizes the government to buy $700 billion in mortgage-backed securities tied to poorly performing home loans. But it has a secondary aim: to keep people in their homes.
The legislation requires Treasury Secretary Henry Paulson to "implement a plan to mitigate foreclosures" and "identify opportunities to modify loans." It also requires the government to work with lenders "to encourage loan modifications."
That's not forceful enough, advocates say.
"The government buying these securities does not allow them to substantially expand loan modifications," said Paul Leonard, California director of the Center for Responsible Lending, a consumer advocacy group.
Leonard and others say the government won't be able to alter loans on its own because of the way the mortgage-backed securities it is buying are structured.
Without unilateral authority to modify loans, they say, the rising tide of foreclosures – 500 or more every week in the Sacramento area alone – won't soon subside. More bank-owned homes on the market mean home values will continue to fall.
"If you don't firm up the bottom of the housing market, the bottom of the pyramid will be like quicksand that will keep pulling down the structure," said Timothy Canova, economics professor at Southern California's Chapman University School of Law. "I think in six months to a year they will be back asking for another enormous bailout because it didn't deal with the root causes of the problem."
Such pronouncements leave borrowers such as Ianthia Turner of Lincoln, who owes $75,000 more than her home is worth, anxious. Turner, who teaches at a beauty college, is current with her payments on her Lincoln home. But last month her husband lost his financial analyst job at an area bank.
"We're just holding our breath," she said.
Since January 2007, more than 21,000 area households have lost their homes to the banks, according to MDA DataQuick, a housing market researcher. Turner is like thousands of other people trying to work things out with her mortgage lender. In July, according to DataQuick, just 22 percent of borrowers who default – falling two or three payments behind – were able to save themselves from foreclosure.
"We've been talking to them and they claim they got our paperwork," she said of her discussions with her lender. "But they have been really slow to respond. They always say, 'Somebody will get back to you.' "
Many consumer advocates, who say that banks are too slow to modify troubled loans, hoped the Wall Street bailout bill might be tougher on lenders.
They wanted to give bankruptcy judges the authority to rewrite loan terms for borrowers, especially those steered toward loans they couldn't afford. But the idea didn't prevail.
Good thing, said Jonathan Stein, an Elk Grove attorney who specializes in foreclosure cases. He called the bankruptcy judge plan unworkable.
"Our bankruptcy judges are busy enough handling what they're handling without getting into the minutiae of valuing a house," he said.
A key part of the bill signed Friday encourages loan servicers to modify mortgages through the government's new $300 billion Hope for Homeowners program.
Launched Wednesday, it aims to refinance 400,000 borrowers with risky adjustable-rate mortgages into fixed-rate 30-year loans. The Federal Housing Administration will insure the new loans.
But there's a catch: Loan servicers must "write down" the new loan amount to the home's present value. That means investors must accept losses.
Turner, who sees the value of a house she bought for $506,000 in March 2007 "going down even further," hopes to persuade her lender to consider such a restructuring.
"I'm looking for anything at this point," she said.
Statistics gathered by the state of California show that's likely to be a hard sell. Ten loan servicers that are a part of a state program to help borrowers wrote down just 575 loans from January through July, according to the Department of Corporations.
During that time, the same lenders repossessed 89,000 homes in California.
Lenders in the state program preferred to modify loans through interest rate freezes or cuts. They reported 63,000 modifications from January through July.
Some real estate industry watchers believe Friday's bailout bill wisely avoids detailing specific help for individual borrowers. Steven Krohn, a real estate broker and economist with Sacramento-based Real Estate Group, said the best way to get through the housing crisis is to let market forces re-price homes.
"I've had friends go through foreclosures, and it's awful," he said. "The sooner the market adjusts the better off we are."
Those who counsel troubled borrowers have a different view. Pam Canada, executive director of Sacramento's NeighborWorks HomeOwnership Center, fears Friday's rescue might now make banks less likely to help borrowers.
If lenders can, "in one fell swoop, get rid of a couple hundred deals rather than negotiating each one, I'm afraid that could make it easier for them, again leaving the homeowner with no rescue," she said.
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Written by Jim Wasserman, Sacramento Bee