The Morning Report
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Monday, Nov. 10, 2008 | As the federal and state governments evaluate ways to salve communities flogged by foreclosure, those who aren’t eligible for the help are making deliberations of their own — notably, trying to figure out how the bailouts will affect them.
Take Lesley McAllister, for example. An assistant law professor at the University of San Diego, McAllister lives with her husband and two children in a rented home in Mission Hills. The family moved to San Diego three years ago and decided to rent rather than buy a place, even though they were previously homeowners in Northern California.
Like McAllister, many professionals in San Diego decided to rent during the boom, thinking that housing had become overvalued as prices skyrocketed by 150 percent in five years. To them, an annual price decline of 26 percent means the market is on its way to a point of equilibrium. Even with those declines, prices remain nearly 70 percent higher than they were at the start of 2000. If prices keep falling, renters such as McAllister anticipate they’ll be able to afford a house with a traditional mortgage, without stretching themselves to the limit or banking on future appreciation to make homeownership attainable.
Their voice was drowned out by the drumbeat of housing frenzy, and they dread being overshadowed again. They fear government plans to keep homeowners in their houses will unnaturally keep prices at unaffordable levels in some places. By helping homeowners stay in homes they could’ve never afforded without using exotic loans, governments might artificially buttress prices that have further to fall, McAllister said.
“I realize people are in difficult situations, but my main concern that prices be allowed to come back into whack — into a reasonable relationship to income,” she said. “That’s a better long-term scenario than trying to prop up prices.”
Plans to help distressed homeowners have been floated at various levels of government, and there are a few major ones being discussed currently at the national level. The plans aim to stem a major economic crisis hitting communities that have seen spikes in the number of homeowners losing their homes to foreclosure. Foreclosures have ravaged some parts of San Diego County as the number of trustees deeds filed skyrocketed by 174 percent in the second and third quarters this year compared to the same quarters in 2007, according to MDA DataQuick.
The plans on the table combine a few options, including lowering mortgage payments, lowering interest rates for a time, and in very limited cases, reducing the principal balance owed on the loan. All would depend on a borrower demonstrating significant financial hardship and an inability to make the payments as they’re currently structured.
If governments and banks can work out foreclosure relief plans, they hope fewer homeowners will lose their homes, and fewer neighborhoods will see the kind of dramatic price drops that a high number of foreclosures brings. Policymakers hope that such plans will stabilize the economy, slow the declines in the housing market and keep neighborhoods from falling into disrepair.
But the tenets of the plans proposed have attracted some concern. Renters like McAllister worry prices will be artificially propped up. Others worry a bailout plan will prove so enticing that homeowners who can afford their payments will stop making their payments on purpose in efforts to qualify. And because the taxpayers are potentially on the hook to institute such a program, some resent that they’ll pay for the bailout while potentially watching people who weren’t as prudent reap the benefit.
Across California, 27 percent of all properties with a mortgage are worth less than is owed on the loan, according to First American CoreLogic. With every month of declining home values, more homeowners find themselves underwater. As their neighbors in unaffordable loans obtain lower payments from banks in these rescue programs, such homeowners might feel incentivized to try to qualify for help. They might intentionally default on their mortgages, or at least, that’s the worry.
But Gabe del Rio, president of the Housing Opportunities Collaborative, a local consortium of nonprofits dealing with the foreclosure fallout, said an attitude of resentment toward distressed homeowners is ill-placed.
Counselors working to match homeowners with the right program first scrutinize applications for modified loans, he said, applying far more scrutiny than was around when many homeowners obtained their no-documentation loans earlier this decade. If income statements and bank savings show a client could have made mortgage payments but didn’t, that person won’t qualify for the lower mortgage payment.
The it’s-not-fair attitude vexes del Rio, who points out the homeowner has always had the option of working with a bank to negotiate lower payments in times of hardship. These programs are just making that option more accessible.
“For the person who’s not having a hardship who’s jealous that their neighbors are getting lower payments — as far as the fairness goes, if they lose their job tomorrow, they’re going to be thankful for the option that’s available,” del Rio said.
Janet Shelton is sympathetic to a lot of the region’s homeowners who were lured into risky loans that are costing them more per month than they can afford. But Shelton, a homeowner in Escondido, said she’s flabbergasted at the plans for bailing them out.
Shelton purchased her house in the late 1980s for $280,000, and she said it reached a “funny money value” during the boom of more than $1 million. But while people around her withdrew money from their houses, to renovate or buy fancy furniture or eat out every night, Shelton didn’t touch her equity. Now, Shelton dislikes the thought that her tax dollars could go to pay for some of the vacations and toys that other homeowners used their equity to purchase.
“I could’ve taken out a lot of money from my house,” she said. “I could’ve had a pretty good time until the cows came home.”
Shelton said she isn’t as upset about helping borrowers who absolutely can’t make their payments. But she’s concerned about homeowners stopping payment on their mortgages just to get some government help.
“Somebody has to pay for the free lunches, and the more free lunches there are, the more people like myself have to pay,” she said. “I have no doubt that so many of these people were lied to. I didn’t do anything wrong, and it is painful that I have to be paying for the bailout. But even more painful is the mindset, ‘I can afford my payments, but you pay for my lunch, too.’”
After IndyMac Bank failed this year and the Federal Deposit Insurance Corp. took it over, the FDIC announced a workout program for troubled borrowers. Part of that program involves lowering interest rates down to a possible 3 percent for five years, then gradually increasing the interest after the five years. The calculations are dependent on what the borrower can afford, and whether the loan will ultimately be more valuable in its modified state than the value to the bank of just foreclosing on the house, said FDIC spokesman Andrew Gray.
“In an overwhelming majority of cases, we’re seeing it’s preferable for us to modify the loan,” Gray said. “This isn’t a social program that we’ve implemented. This is really beneficial on both sides.”
In such programs, lenders and the government are hoping for borrowers to stick it out in their homes with their new lowered payments. And they insist they’re not just delaying the foreclosure crisis.
“We’re not interested in just kicking the can down the road or prolonging the inevitable,” Gray said.
Del Rio said the fixed lower payment for five or 10 years, as bandied about as part of various rescue plans, also might give the housing market a chance to turn around. If it doesn’t, he said, the homeowners will still have options to avoid foreclosure.
“We’re hoping that people can refinance and that the market bounces back in a decade,” he said.
And, for homeowners who’ve been helped by loan modification programs, any drawbacks seem vastly outweighed by their benefit.
Kathy Flickinger had been calling her bank early in the morning and late at night for a year and a half when she realized her payments would become unaffordable, trying to work out a modification to her loan. Until she found Community HousingWorks, the nonprofit where del Rio is homeownership director, she couldn’t get a lender to take her call.
Finally she obtained a modification to her interest rate, making her mortgage payments affordable. She said she dislikes the sentiment from people who would punish everyone with an unaffordable mortgage payment, and who would allow the economy to slide further rather than create more programs to help homeowners like her.
“The people who aren’t in the situation, they’re lumping everybody into a similar group,” she said. “Sure there were people who were fraudulent and bankers who pushed people into loans, but they want to punish the entire country when they’re worried that somebody’s going to benefit from something that they’re not going to benefit from?”