Expanded foreclosure program

So many foreclosures are about to roll through the system that the Obama administration plans to expand a program aimed at helping people remain in their homes. The goal of the announcement, expected today, is to increase the rate at which troubled home loans are converted into new loans with lower monthly payments, Treasury spokeswoman Meg Reilly said over the weekend. That could include new resources for borrowers, Reilly said, without offering details. Industry officials said the new effort would include increased pressure on mortgage companies to accelerate loan modifications by highlighting firms that are lagging in that area. The Treasury is also expected to announce that it will wait until the loan modifications are permanent before paying cash incentives to mortgage companies that lower loan payments.

Under a $75 billion Treasury program, companies that agree to lower payments for troubled borrowers collect $1,000 initially from the government for each loan, followed by $1,000 annually for up to three years. Michael Barr, the Treasury Department's assistant secretary for financial institutions, says that the Obama administration will try to shame lenders by publicly naming institutions that fail to move quickly enough to lower mortgage payments permanently. "They're not getting a penny from the federal government until they move forward," Barr told the Times. It's not clear how the government is going to solve anything at all by trying to drive lenders into the ground, or how expanding a failing program is going to produce anything more than more failure. Why not stick to programs that work?

Government to meddle in "job growth"

Can the government help spur job growth? Maybe and maybe not, but whatever the answer is, the administration is ignoring the best advice: first do no harm. The ideas for stimulating job growth so far are "at best neutral and at worst harmful to the economy," said J.D. Foster, a senior fellow at the conservative Heritage Foundation. "The economy needs a dose of confidence and certainty, not random, half-baked ideas." CNN has put together a list of options being talked about as potential programs: 1) Foster said it would be better for the administration to make a clear statement that it will not push for any tax increases until the unemployment rate is at or below 7%, something that isn't likely to happen until after the next presidential election; 2) offer a payroll tax holiday: Temporarily suspending the payroll tax - which is a 12.4% tax on workers' first $106,800 of wages; create a new jobs hiring credit: The idea behind a hiring credit is to offer employers a sweete ner if they bite the bullet and hire more people.

The sweetener would come in the form a tax credit for every new hire; Help close state and local budget shortfalls: With jobless rates rising in many states, revenue has fallen, and Mark Zandi, chief economist of Moody's Economy.com, estimates that state and local governments are likely to face a combined shortfall of $150 billion in fiscal year 2011, which begins next summer; and offer public-service employment: Blinder and others have suggested the federal government put money towards creating new public-service jobs.

A mess in loan modifications

While more than 650,000 borrowers have been given trial mortgage modifications under the plan, few borrowers have received permanent modifications. Many borrowers complain that it is difficult to get a permanent fix even once they have made trial payments; some have been required to send in duplicate paperwork or even ended up further behind on their mortgage payments. For borrowers who do receive a trial modification, few are becoming permanent. Some borrowers can't make the required payments during the trial period, mortgage companies say, often because the reduced payment still isn't low enough or they have suffered another financial setback. In other cases, borrowers in the trial program aren't providing a hardship affidavit and other necessary documents or the paperwork doesn't match the information provided verbally. In still other cases, the loan may not pass a "net present value test" used to determine whether a modification is less costly to the lender or investor than a foreclosure.

The Wall Street Journal points to one couple who are actually worse off because of the program: Jennifer and James Pugliese, of Scranton, Pa., were struggling, but still current on their mortgage when Litton Loan Servicing offered them a trial modification that reduced their loan payments by nearly 50% to $758. But after making successful trial payments, the couple was turned down for a final modification. Because the trial payments are considered partial payments if the modification fails, the Puglieses are now more than $5,000 behind on their mortgage; their credit score dropped after Litton reported to the credit bureau that the couple had entered the Obama program. Meanwhile, the number of borrowers falling behind on their loan payments continues to outpace the administration's efforts to help them. Roughly 1.56 million loans that were current in March were at least 60 days past due in October, according to LPS Applied Analytics. That's more than double the number of tria l modifications.

Failed banks hard to sell

Of the 124 banks that have failed so far this year, many of those put up for sale by regulators as part of the seizure process "are of very poor quality," said Norm Skalicky, chief executive of Stearns Financial Services Inc. "It's not as if you can walk in and you are in business." Some are in such bad shape that potential buyers won't touch them at any price, even if the government agrees to eat losses on the failed bank's bad loans. In addition to their depleted capital, many seized banks operate in areas with sluggish growth prospects, are puny and are loaded with expensive deposits gathered through brokers that are likely to leave when the acquiring bank reins in interest rates, some bankers complain. The supply of ideal targets—sensible deposit-gatherers that fatally "overextended" their loan portfolio—is slim and the competition fierce.

Sluggish interest in doomed banks could push the FDIC's losses higher at a time when the agency's fund to shield depositors is in negative territory for just the second time in its history. Kevin L. Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP, said FDIC officials might be forced to bundle some small banks together in order to lure potential buyers. An FDIC spokesman said the agency isn't having trouble lining up buyers. About 95% of banks seized by regulators have been sold. While some attract few bids, the FDIC has "had tremendous success in finding buyers," the spokesman said. Two of the nine banks that failed this month were sold without loss-sharing agreements. However, in many cases "there are fewer bidders" and "the folks that are bidding realize that," lowering their offers, said Mr. Petrasic, a banking lawyer. As a result, said Kip A. Weissman, a partner at Luse Gorman Pomerenk & Schick PC, there are "probably going to be more liquidations and high -loss deals."
 

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