Real Estate: ‘Project Lifeline’

In an effort to ease the growing housing crisis, the Bush administration Tuesday announced a new plan to help the estimated 1 million Americans at risk of losing their home this year and next. "Project Lifeline" gives qualified homeowners facing foreclosure a 30-day reprieve, during which they can try to negotiate a payment plan with their lender. Unlike past initiatives, this program will be available to seriously delinquent homeowners with either prime or subprime loans, which target high-risk borrowers. Subprime mortgage holders have accounted for the vast majority of foreclosures over the past few years, but there are indications that even homeowners with good credit histories are now falling behind. More than one-third of the foreclosures that started in the third quarter of last year involved homeowners with a prime mortgage.

Six of the country's largest mortgage companies, representing about half of the U.S. market, have already pledged to participate in the aid program, including Bank of America, Citigroup, J.P. Morgan Chase & Co., Washington Mutual and Wells Fargo. Treasury Secretary Henry Paulson has urged others to join as well. Even if all lenders sign on, though, the aid comes too late for millions who have already lost their homes to foreclosure or are scheduled to do so in less than 30 days. And it's unclear whether a monthlong pause in foreclosure proceedings against borrowers more than 90 days behind will be enough to have a major impact. NEWSWEEK's Jennifer Barrett discussed the new plan with Kenneth Wade, CEO of NeighborWorks Americas, a nonprofit corporation that supports more than 240 affordable housing and community development organizations nationwide and runs, with the Homeownership Preservation Foundation, a help line for those facing foreclosure (1-888-995-HOPE). Excerpts:

NEWSWEEK: How much of a difference will this plan make for homeowners struggling to cover their mortgage payments?
Kenneth Wade: Anytime you can give borrowers more time to seek a solution other than foreclosure it's a good thing. The fact that these six [mortgage] servicers have stepped up to the plate, offering this as an additional tool, is great. Obviously, many more probably need to do the same thing [to really make a difference].

Why haven't even more mortgage lenders signed on?
From what I understand, it was just timing. It would have taken more time to get all these other servicers.

What advice would you give delinquent homeowners who don't have a loan with one of these six?
They should ask for the same opportunity extended by these six servicers.

Is 30 days enough time to fend off foreclosure?
It can be. It's not enough time to finalize a resolution, but it will give you an opportunity to develop a game plan.

These six lenders have agreed to reach out to seriously delinquent homeowners, but many who lose their homes never talk to the bank servicing their mortgage beforehand. Why is that?
Historically, 50 percent of all people who have gone to foreclosure in years past have had no contact with their servicer. That is the magnitude of the challenge. There are a lot of reasons … They're embarrassed, they think they can work it out on their own, or they feel nothing can be done. In some cases focus groups have found that homeowners think it would only accelerate the foreclosure process. Couple that with how servicers have historically worked with homeowners—mostly interacting on the collection end. And the collection approach, unfortunately, is just designed to get a payment and not to seek a permanent solution to the problem … Also, there are some investor owners and those who may have speculated on the market, and a lot of these programs [including Project Lifeline] are not available to them.

I understand more than 200,000 people facing foreclosure have called the hotline since it was created last summer. Are both subprime and prime borrowers calling?
The numbers are [up]—a combination of more and more people getting into trouble and more folks learning about these services. The general trend does suggest that borrowers above and beyond just subprime borrowers are calling in greater numbers.

What else should lenders do now to help solve the housing crisis?
Extending this program to other servicers would be an immediate first step … More aggressive modifications on the part of servicers would also be helpful.

What kind of modifications?
Now that we have a better handle on the scope and scale of the problem, lenders are going to have to do more to extend interest-rate freezes [on mortgages] for consumers and do principal write-downs to create sustainable homeownership.

What kind of write-downs are we talking about?
It would vary market by market. If you lived someplace like Michigan or Indiana, for example, where housing values have declined over the last year anywhere from 20 to 30 percent, we'd be talking about a significant write-down. In other markets, where the home values declined less, you'd need to go less of that distance. Lenders are in a position to do that kind of market analysis.

Are we just talking about subprime mortgage borrowers here?
I would think this is something to look at across the board. Part of the challenge that lenders have with all loans is whether the existing collateral [the current value of the home] supports the principal balance of the loan [what the homeowner still owes in principal, not including interest]. In many cases, lenders have taken write-downs because they evaluated their portfolios and determined that the value is no longer what they'd assumed it to be when the loan was made. This is a pretty broad-based phenomenon.

Homeowners should know that adjustable rates can go up and that housing values can go down. How much responsibility should they assume?
In all cases, a homeowner will end up assuming some responsibility on a go-forward basis. I don't think anyone is looking to give homes to people.

But why write down part of a delinquent homeowner's mortgage, while other homeowners who make timely payments get stuck paying the whole principal? Isn't that unfair?
Part of the challenge we have now is the broader economic impact of what we are seeing. Further foreclosures will cause further erosion of housing values. If two people on my street go into foreclosure, even if I pay my mortgage [on time] my house will be worth less. I'm not sure it's in anyone's interest to let this spin out of control.

Do you think the foreclosure rates could continue to climb?
We haven't seen the worst of it yet. There'll be more resetting [of adjustable mortgage rates] over the next year or so. By some estimates, if we don't get ahead of this, before the number of resets peaks next year, we could see the largest loss of home values since the Great Depression.