Housing crisis won’t end quickly

President Barack Obama’s $275 billion rescue plan and the suspension of foreclosures by some lenders will do little to end the crisis in the housing industry soon, according to a Bryant University professor, and could eventually mean that mortgages will be tougher to obtain in the years ahead.
“The major problem now is that a lot of mortgages are held by investors and these can’t be modified at all,” Peter J. Nigro, professor of finance, told Providence Business News.
He referred to mortgages that “have been packed up in pools and sold to investors” versus those owned by individual banks. It is very difficult to get investors to agree to modifications, Nigro said, but “eventually, we will have to deal with modifying the principal amounts of these loans.”
Nigro was responding to Obama’s plan and the fact that several major lenders are suspending foreclosures, such as Waterbury, Conn.-based Webster Bank. and the Providence-based Citizens Financial Group Inc. Ed Steadham, vice president of public affairs for Webster, is convinced that delaying foreclosures has helped homeowners, the community and the bank itself and will continue to do so.
Webster, a subsidiary of Webster Financial Corp. (NYSE: WBS), is extending its voluntary moratorium on home foreclosures for Webster-owned mortgages to March 31. The moratorium, which began in November as a 90-day stay, originally was scheduled to end Feb. 13. To take advantage of it, holders of Webster-backed homeowners must be at least 30 days delinquent on mortgage payments as of Feb. 13.
“There’s no getting around it, it’s a very complex problem, and to say we or anybody else have found a cure-all solution is just not true,” said Ed Steadham, vice president of public affairs for Webster. “The point is to get people into mortgages they can afford.”
Steadham said the bank reached out proactively several months ago to identify Webster mortgage holders either in foreclosure or at risk and, of the 368 homeowners contacted, roughly one-third – about 125 – were able to modify their mortgages to make them more affordable. This represents mortgages totaling over $27 million in balances, the bank said in a news release.
Mortgage assistance may include such options as: temporarily reducing the monthly payment, extending fixed payment periods on adjustable loans, extending mortgages beyond the current term, refinancing or adjusting interest rates, the bank said. Webster has approximately $3.1 billion in its mortgage portfolio and ranks as one of the top mortgage-originating companies in New England. Webster has 10 branches in Rhode Island.
Citizens Financial Group, based in Providence, also joined the roster of major banks that are temporarily stopping home-mortgage foreclosures. Citizens announced Feb. 18 that it has placed a temporary foreclosure moratorium on Citizens-owned mortgages on owner-occupied residences and “on mortgage loans serviced by Citizens for which understandings with investors have been reached.” Citizens’ stay remains in effect until March 12.
The bank initiated its foreclosure suspension until the details of Obama’s $75 billion Homeowner Stability Initiative are released, which is expected by March 12, according to spokeswoman Kathy P. O’Donnell. The foreclosure rate, as part of Citizens’ companywide foreclosure portfolio, is 0.5 percent.
Obama’s plan would set aside $200 billion in new funding to refinance loans for as many as 5 million homeowners through the government-controlled Fannie Mae and Freddie Mac, and, under the Homeowner Stability Initiative, another $75 billion to encourage other lenders to modify loan terms for as many as 4 million homeowners at risk of foreclosure.
Nigro is not convinced that pumping another $200 billion into Fannie Mae and Freddie Mac will do more than simply add to the taxpayers’ and federal government’s growing level of risk.
Proposals to lower interest payments on mortgages through government subsidies will not help everyone caught in the housing crisis, according to Bryant’s Nigro. If I am someone who bought a house for $500,000 a few years ago, and its value since has dropped to $300,000, “I don’t care what my interest rate is,” he said. “I’m probably better off just walking away and mailing in the keys.”
Taking a long-term view of the housing market, Nigro said, by about six or seven years from now, the aftereffects of the current crisis probably will “force mortgage rates way up and make it more difficult to get mortgages. In the long term, [the housing crisis] will impact credit access, and we have already seen it starting to happen.”
Karl A. Martone, president-elect of the Rhode Island Association of Realtors, said his organization has yet to take a stand on either a foreclosure moratorium or Obama’s plan because “we don’t have all the facts yet.” Asked whether suspending foreclosures might only serve to extend the ills of the housing market, Martone acknowledged that “we have a lot of inventory that needs to be sold to people who can afford it.” Such inventory usually sells best when vacant.
In Rhode Island, according to Boston-based publisher The Warren Group, 3,479 foreclosure notices were issued in 2008, peaking at 495 in October. •