WASHINGTON (Reuters) - Many plans in Washington that aim to save troubled borrowers fall short of halting a rising tide of home foreclosures, according to some analysts who are pushing novel ideas to help borrowers keep their homes.
The rate of home loans in foreclosure rose to a record high in the second quarter and loan failures are expected to increase into early next year, the Mortgage Bankers Association said earlier this month.
While soaring defaults have prompted lawmakers and the Bush administration to propose foreclosure-prevention plans, some experts say those plans lack needed imagination and are pushing ideas of their own.
One plan would give homeowners who cannot make mortgage payments the right to remain in their homes as a renter.
While this would mean occupants would not enjoy the benefit of any future home price gain, it would save them the cost and disruption of moving and preserve the integrity of the neighborhood, said Dean Baker, a director of the Center for Economic and Policy Research in Washington.
“There can be a lot of secondary costs of foreclosure. If you keep the home occupied, it can prevent a downward spiral for the neighborhood that you might otherwise see,” Baker said.
Late last month, President George W. Bush loosened standards for the Federal Housing Administration, which guarantees loans to needy borrowers, with the aim of saving more troubled borrowers from foreclosure. Now, homeowners who have missed several mortgage payments can still qualify for loan guarantees.
The FHA reforms should help 240,000 homeowners win more favorable loan terms next year and several lawmakers have their own plans to extend federal programs. The effort is particularly aimed at subprime borrowers who won a home loan despite damaged credit.
Andrew Jakabovics, a housing analyst at the liberal Center for American Progress, argues the government should do more to subsidize mortgages and offer loans directly to borrowers in default.
Under Jakabovics’ program, the federal government would swap tax-free bonds for a lender’s troubled loans through a restored Home Owners’ Loan Corp. conceived in the 1930s.
“During the Depression, banks initially balked at accepting HOLC offers, but they ultimately changed their minds, recognizing that the 4 percent guaranteed bonds they were offered handily beat the zero percent returns on unpaid mortgages,” Jakabovics wrote in an essay promoting his idea.
The original HOLC program was temporary and a renewed program could wind down when the housing crisis passes, he said.
Other housing experts advocate expanding ‘shared equity’ programs in which the lender and homeowner each benefit from any future home price gains.
Under the program, a state or local government covers a portion of the home price and so gains a stake in the property when it is sold. Such programs have been used for years in California neighborhoods where teachers, police and other government workers have been priced out of homeownership, said Maya Brennan, a spokeswoman for the National Housing Conference which promotes affordable homeownership.
“This has the possibility to offer assistance in a variety of markets,” Brennan said.
In a similar program, a local government simply subsidizes up to 20 percent of a home’s price with a second lien.
One drawback of “soft second” liens and “shared equity” programs is the weak secondary market for such loans that makes them hard for investors to price or sell.
No lawmakers yet taken up either the homeowner-to-renter proposal or the plan to revive the government lending program.