HOME RESCUE BUILDS UP HOPE

Maybe this time government intervention will really work.

That’s what metro Atlantans involved in real estate are hoping after President Barack Obama last week announced a plan to help millions of homeowners at risk of foreclosure.

The consensus appears to be that the $275 billion package could succeed by encouraging lenders to rework millions of high-cost mortgages nationally and by keeping interest rates low to encourage people to buy homes or refinance their current loans.

But some of the industry players said it may not offer enough incentives to win widespread support from financial institutions. The program also won’t rescue many other homeowners who have lost jobs or whose home values have already declined too much.

“I think everybody acknowledges that it will not save every home,” said Jim Young, president of Citizens Trust Bank in Atlanta. Also, he said, many taxpayers will be unhappy with the program’s incentive payments to borrowers and financial institutions to rework problem loans.

“I think we have to look beyond that to the probable impact on the economy if nothing is done,” said Young, whose bank abandoned the increasingly risky home loan business in recent years.

Despite largely being a bystander, Young said he hopes the Obama administration’s Homeowner Affordability and Stability Plan will help him and most other homeowners.

“I still benefit from this bill if it stops the spiraling decline in home values [from foreclosures], some of which is in my neighborhood,” he said.

Under the proposed plan, the government will set aside as much as $200 billion from last year’s Housing and Economic Recovery Act as additional backing for Freddie Mac and Fannie Mae. The government-controlled mortgage companies, which have long helped to bankroll a large share of the nation’s mortgages, will play a key role in the rescue plan.

The government hopes to allow up to 5 million homeowners whose loans were guaranteed by the agencies to refinance their loans at lower rates. That would lower their monthly payments by hundreds of dollars in some cases.

The program, which takes effect March 4, would be open to homeowners who haven’t fallen behind on their mortgage payments but whose home values have fallen by moderate amounts.

Another part of the plan earmarks $75 billion to modify mortgages to rescue up to 4 million homeowners who would otherwise face foreclosure due to falling incomes, rising mortgage rates or other challenges.

Under the voluntary program, lenders and the government will work together to modify homeowners’ mortgages to cut their payments to 31 percent of their income. Loan servicers would receive “pay for success” incentive payments of up to $1,000 annually, and lenders can get upfront fees of as much as $1,500 for a successfully reworked loan.

Likewise, homeowners who keep up with payments on their reworked mortgages would get credits of up to $1,000 annually for five years. The credits would reduce their loan balance.

In a controversial move to pressure lenders to participate, the Obama administration also plans to seek legislation to allow bankruptcy judges to rework problem mortgages by cutting loan balances to a home’s current market value.

The plans are aimed at replacing earlier government and industry efforts at preventing foreclosures that have fallen short. Congress set up a voluntary program last fall called Hope for Homeowners to allow struggling homeowners to refinance their loans, but with little result. With the latest plan, however, the combination of sweeteners, sharp teeth and long-term relief may be more likely to produce results, some industry experts said.

“I think it’s safe to say this is a much broader plan,” said Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta. The number of homeowners seeking advice from the nonprofit organization on how to avoid foreclosure has surged 132 percent over the past year.

Boas said she’s “encouraged” that the plan covers struggling homeowners whether or not they’ve fallen behind on payments.

The incentive payments may also attract loan servicers who didn’t participate in the past because of the administrative costs of reworking loans, Boas said.

However, such firms, which collect payments and distribute them to mortgage investors, still may be reluctant to participate, she added. Some have been sued by investors after agreeing to modify mortgages that had been pooled in such mortgage-backed securities.

The Obama plan also may not be much help to many of the clients of Boas’ agency, she said. Because of job losses, medical bills, divorce or other challenges, many are already too deep in financial holes to dig out with the help offered by the government, she said. On average, they’re three months behind on mortgage payments, and their monthly incomes are about $1,400 short of covering their mortgages and other expenses, she said.

“If you’re not able to close that gap … just a modification of your mortgage loan is not enough,” she said.

Former Wachovia vice president Kyle Drake said the incentives also may be too small for financial institutions. Bank loan mitigation departments and loan servicers are understaffed, and the government’s cash offers are unlikely to solve that problem.

“A thousand dollars does not provide enough incentive for the bank to go out and hire more people,” Drake said.

Another financial incentive for lenders could speed up the pace of home sales aimed at avoiding foreclosure.

Under the Obama plan, lenders who don’t want to modify loans will receive incentives for choosing an alternative to foreclosure, such as a short sale. In a short sale, a lender allows a home to be sold for less than what’s owed on the loan if it determines that loss will be less than a foreclosure loss. A seller’s credit rating does not suffer in a short sale like it does in a foreclosure.

Tonya Wills, who works for a bank, said she opted for such a short sale rather than going through foreclosure, but it took six months to get the bank to agree to the deal.

Wills had bought a foreclosed house in College Park two years ago for $123,249, but she defaulted when her mortgage payments kept climbing and she felt unsafe in the neighborhood. The house is now listed for $83,000.

Wills’ real estate agent, Dionne Stokes-Hicks of Keller Williams, hopes the new government incentives will speed up short sales and make them more common to help unlock the depressed housing market.

Zac Pasmanick, founder of the Zac Team at Re/Max Greater Atlanta, was in Denver last week attending training in short sales and loan modification.

“This is going to be so large in the next 12 to 24 months with so many loans recasting,” he said. “I have no choice but to become an expert in it.”

David Ellis, executive vice president of the Greater Atlanta Home Builders Association, said he’s encouraged by the one-two combination of the foreclosure prevention plan and an $8,000 tax credit for first-time home buyers —- which was included in the $787 billion federal stimulus program that Obama signed last week.

“I think that anything that begins to curb the foreclosure process … is a positive thing. As to whether it works is anybody’s guess,” he said. “It certainly sounds to me like a good start.”