WASHINGTON – President Barack Obama next Wednesday will roll out a plan to attack the trigger of the current global financial crisis: rising U.S. mortgage delinquency and foreclosure rates.
However, he’ll be trying to fix one problem as another, perhaps larger, one is unfolding.
Obama will unveil in Phoenix how he’ll spend some $50 billion, carved out of the Wall Street bailout money passed last October, to help reverse the soaring number of mortgage delinquencies and defaults.
In light of Obama’s pending plan, three major banks announced Friday that they would suspend foreclosures indefinitely while the government develops its plan. The banks are Bank of America, Citigroup and JPMorgan Chase.
Because the foreclosure problem was allowed to fester so long, home prices nearly everywhere in the nation have fallen. Millions of homes now are worth less than the mortgages that paid for them, making it impossible for many homeowners to refinance even with today’s low mortgage rates.
A trial balloon floated this week suggests that Obama will follow the suggestions of Federal Deposit Insurance Corp. Chairman Sheila Bair, who thinks that banks must take some losses and get owners of distressed mortgages into a monthly mortgage payment that amounts to somewhere from 31 percent to 38 percent of their monthly after-tax income.
Bair proposed this idea, carrying it out in instances where her agency seized failing banks and could rework loans on their books. She was opposed, however, by then-Treasury Secretary Henry Paulson and others in the Bush administration who wanted to keep the focus on problems in credit markets.
Consequently, the new foreclosure-relief plan by Treasury Secretary Timothy Geithner comes late in the game and in a deteriorating environment. Since 2006, when the scope of the housing problem first became apparent, more than 1 million homes have been foreclosed. Some estimates suggest that number could increase to 6 million by 2013.
Even as Obama tries to halt the foreclosures, the deepening recession layers on new problems. Beyond the shoddy subprime mortgages given to the weakest borrowers, the default rate is climbing for borrowers who had been in good standing as they join the ranks of the more than 3.6 million Americans who’ve lost their jobs since the recession began in December 2007.
When Congress began looking seriously at the housing issue in 2006, there was strong opposition, particularly among Republicans, to using taxpayer money to rescue homeowners who made bad choices. That philosophical opposition, however, allowed a regional problem in states such as California and Florida to spread nationwide, reducing home prices across the board.
“I think the macroeconomic effects of this are now so clear (that) there is more support for government intervention,” said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. “This is not going to get resolved unless there is some public money.”
Speaking to a small group of reporters Friday, Frank said the Obama administration will put forth a plan that involves shared burdens on banks, borrowers and the government. The federal government won’t seek to buy up distressed mortgages; instead, it will contribute toward lowering the mortgage burden.