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Paulson Plan Helps Very Few

Monday, January 28, 2008

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An updated analysis by the Center for Responsible Lending shows the Treasury Department's plan involving streamlined loan modifications of distressed mortgages will prevent only 118,200 foreclosures—about 3% of the outstanding subprime mortgages with adjustable interest rates that are causing the current market turmoil. This analysis shows the Treasury plan, plus existing lender modifications, barely make a dent in the growing foreclosure crisis and will allow subprime damage to continue spreading through the entire economy.

The Center's analysis is based on recent industry data on delinquent mortgages and on industry analyses of loan modifications made by lenders. The attached chart summarizes the Treasury plan analysis. In addition, recent MBA data shows that lenders' voluntary loan modifications are dwarfed by the number of impending foreclosures. Consider these facts:

  • On all loans, industry data show that for every loan modification made by a lender, 7 times as many foreclosures are initiated. For the subprime adjustable-rate mortgages (ARMs) that are at the root of the current crisis, foreclosures outnumber modifications 13 to 1.
  • Lenders are giving themselves credit for loan "repayment plans," but these should not count. Repayment plans make homeowners' monthly mortgage payments higher. And they allow lenders to designate a distressed loan as being current without actually changing any of the terms that made a mortgage unaffordable in the first place.
  • It is questionable whether even the true loan modifications will be sustainable because lenders have no obligation to report outcomes. In fact, previously Countrywide acknowledged that most of its touted modifications actually "involved deferring overdue interest or adding the past due amount to a loan", not reducing interest rates or principal balances on unaffordable subprime ARMs.[1]
  • The Treasury plan will be a welcome relief for those it helps, but given the magnitude of today's economic woes, the plan won't help nearly enough to avoid further widespread economic damage from foreclosures.

The subprime problem is so large it has become everyone's problem. Foreclosures are not only harming the families who lose homes, they also spread negative effects through entire communities and the wider economy. In a recent analysis, the Center found:

  • 40. 6 million neighboring homes will experience devaluation because of subprime foreclosures that take place nearby.
  • The total decline in house values and tax base from nearby foreclosures will be $202 billion.

To the extent that we can prevent foreclosures and help struggling homeowners continue paying, we will help the entire economy.

According to Eric Stein, senior vice president of the Center, "The most effective policy for significantly reducing foreclosures would be permitting court-supervised modifications of distressed mortgages—but homeowners are specifically excluded from such relief under current bankruptcy law. Legislation to remove this barrier is now moving through both the House and the Senate. Congress has the power to prevent 600,000 homes from being lost to foreclosure, at no cost to the national Treasury," said Stein. "We urge Congress to pass this necessary legislation, both for homeowners and the nation's economy."

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[1] Gretchen Morgenson, "Can These Mortgages be Saved?" New York Times (September 30, 2007)

For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; or Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org.