The State Of the Union Ignores the State of Sub-prime

In his final State of the Union address Monday night, President Bush concentrated on talking up the occupation of Iraq. The speech had an even greater air of a lazy student mailing it in than most Bush efforts. The viewer got the idea that he knew a lame duck president with through-the-basement approval ratings, a hostile Congress and an electorate focused somewhat talismanically on the word “change” is really kind of yesterday’s bad news.

Still, he dutifully trumpeted his HOPE Now program which encourages the banks who peddled, sold and resold abusive mortgages to voluntarily offer re-financing to a very narrow slice of borrowers on the brink of foreclosure. Volunteerism is heart-warming and all, but with even mega investor George Soros saying lax regulation of the banking industry got us into this credit crisis, it’s hard to believe voluntary measures are going to work. After all, the banks could have voluntarily agreed not to push sub-prime mortgages with opaque repayment stipulations on people who qualified for good old 30-year fixed rate mortgages.

Bush also said Congress should act to modernize the Federal Housing Administration and reform Freddie Mac and Fannie Mae, the federally chartered, privately held mortgage insurers. Both agencies operate on a secondary mortgage market, buying mortgages from banks and thus keeping the money flowing, something economists say is necessary at a moment of economic slowdown and anemic credit markets. In an analysis of the State of the Union that they must have been up working on all night, the Drum Major Institute explained the role of Freddie Mac and Fannie Mae this way, “When lenders have the ability to sell mortgages on the secondary market they have the means to readily refinance mortgages and help ordinary homeowners escape unaffordable loans.”

But Fannie and Freddie can currently only buy small and medium-sized mortgages. DMI supports Bush’s plan to up that limit. “FHA modernization must be accompanied by Freddie Mac and Fannie Mae modernization which will expand the conforming loan limit and enable Freddie Mac and Fannie to buy mortgages up to $730,000.”

The idea is that permitting the federally chartered entities to buy pricier mortgages would be a kick in the pants to the slow real estate market: sales of single family homes fell 13 percent in 2007, the largest drop in 25 years, according to DMI analysis.

People on the front lines of the sub prime and foreclosure debacle here in NYC told Runnin’ Scared last week that all the efforts to mitigate the crisis, whether state, city or federal need to be more robust. While New York State’s Keep the Dream program is more ambitious than Bush’s Hope Now, it still is too narrow, said Oda Freidheim, staff attorney for Legal Aid Society’s Queens Neighborhood Office.

In fact, since its institution in September, Keep the Dream has helped count em, two people, secure restructured mortgages. That’s because the state program can only help people who are not yet in foreclosure restructure their loans, not the hundreds who have already gone over the brink. Housing counselors, neighborhood housing experts and attorneys like Freidheim who deal with a steady stream of people sinking into foreclosure say none of the mortgage crisis responses so far proposed in Washington or Albany actually help the people in most dire need.

While the ticking time bomb of adjustable rate mortgages about to balloon has everyone scrambling to avert mass foreclosure, in some neighborhoods the bomb has already exploded. With the stricter personal bankruptcy law Congress passed last session, many New Yorkers are high and dry as the homes they couldn’t afford are sold out from under them, Freidheim said.

Hope Now and Keep the Dream are both focused on prevention, not rescue. It’s something like testing the smoke detectors when a house is in flames.
“We need a remediation fund. The idea of having a wholesale approach among lenders, that’s what we need because its hard to do it one by one by one,” said Friedheim, who advocates a federal response that would provide the financing and mandate to restructure all the sub prime mortgages in danger of default. “It’s not enough to say ‘prevent resetting’ most of these loans were not affordable in the first place,” Freidheim said. “Unfortunately a lot of people really got duped. Brokers got bonuses for pushing even higher interest loans. There was a strong incentive for brokers to peddle these aggressive loans. A lot of new programs need to address that yeah, people got duped.”

Priscilla Almodovar, president and chief executive of the State of New York Mortgage Agency and Housing Finance Agency admits the Keep the Dream program has started small, but said it isn’t meant to help everyone.

“It’s a very complicated issue. No one program or response could help everyone,” she said in an interview before Gov. Elliot Spitzer’s state of the state address. “What Keep the Dream was trying to do was lessen the burden going forward. Let’s find a way to reset (the interest rates) for those who are current in their payments. It’s not mean to help everyone.” Keep the Dream targets homeowners with decent credit who are no more than two months behind on their mortgage payments. “People tend to call us or the counseling agency when its too late,” Almodovar said, explaining why the agency has received hundreds of phone calls requesting a life line but only been able to secure loan restructuring for two clients. People have called SONYMA to plead for help because their home is being sold at auction the next morning, Almodovar said. There’s nothing her agency can do at that late stage. “The earlier you try to get help the better.”

One major limitation on SONYMA’s reach, Almodovar said, is that most of their underwriting comes from Fannie Mae, which sets strict limitations on the loan size. Bush’s call to reform Fannie Mae and Freddie Mac could in turn give the state’s program more breathing room, permitting Almodovar to cast a wider net for distressed homeowners.

“As with any government program the issue is getting the word out. We only started in September. We want this to be successful,” she said.