New Obama Foreclosure Plan Helps Banks At Taxpayers’ Expense

The Obama administration is introducing a new program that is designed to lower monthly mortgage payments for troubled homeowners but a key part of the plan would shift financial liabilities for refinanced loans from Wall Street banks to American taxpayers.

The Home Affordable Refinance Program, the administration’s attempt to help borrowers who owe more on their mortgage than their homes’ worth, had been limited to borrowers who owed up to 25 percent more than their home is worth. Thus far the program has had a very anemic response. More than 22 percent of all home mortgages, 10.9 million homes, are currently underwater and fewer than 900,000 borrowers have actually utilized the HARP program. The program will now be open to all underwater borrowers who have not missed a payment.

On a conference call with reporters, White House National Economic Council Director Gene Sperling referred to the expansion as “a win-win policy” that will result in “less defaults” and “fewer foreclosures.” But one of the program’s new terms will benefit private-sector Wall Street banks, at the expense of taxpayers.

The newly expanded program would erase the legal liabilities connected to mortgages refinanced through the program for the original lender. Each time a bank sends a loan to Fannie and Freddie, it certifies that the loan meets Fannie and Freddie’s safe lending standards. Currently, when borrowers default on ineligible loans that do not meet the mortgage giants criteria, they can “put back” the resulting losses onto the banks that pushed the bad loans. Under the modified plan, banks will be exempt from “put backs” of underwater mortgages that are refinanced through HARP, essentially giving lenders a new route to socialize bank losses.

If borrowers go through HARP, but decide that the monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank.

The administration says they will charge banks a fee under such scenarios but has yet to determine what that fee will be.

The revised program aims to lower mortgage payments for underwater homeowners, but the program does nothing to deal with the problem of borrowers owing more than their home is worth. Savings may be in the range of hundreds of dollars but what is owed is routinely in the range of tens of thousands of dollars even after receiving aid.

“In most cases people would probably be better off walking,” said economist Dean Baker, co-director of the Center for Economic Policy and Research.

During a conference call with reporters, Department of Housing and Urban Development Secretary Shaun Donovan acknowledged that negative equity is a problem, and said the administration hopes to address the issue on other fronts. Donovan cited settlement negotiations with big banks over widespread allegations of foreclosure fraud and initiatives under the Home Affordable Modification Program, a separate Obama foreclosure-relief plan administered by banks, as key initiatives.

New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have both objected to the foreclosure fraud settlement talks on the grounds that they give away too much to banks without investigating the scope of fraud problems in the system.


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