Congressional Panel Wants More for Stopping Foreclosures

The U.S. Congressional Oversight Panel has praised President Barack Obama’s $275-billion program to stop foreclosures, but also faulted it for not including second mortgages and for not instituting a legal framework that could facilitate loan modification. Specifically, the panel cited the lack of a scheme to help owners of second mortgages and the lack of legislation to empower judges to help bankrupt homeowners avoid foreclosures.

The panel was instructed to evaluate how the Troubled Asset Relief Program (TARP) is being implemented and whether it is achieving what it was legislated for. The TARP was approved by Congress under the Bush administration in 2008 and funded with $700 billion to solve the financial crisis and mitigate foreclosures.

While the Bush administration focused on helping the financial industry, the Obama administration is focusing more on helping borrowers save their homes from foreclosures while also helping financial and car manufacturing corporations. The panel praised the goal of helping up to 5 million borrowers with refinancing under Fannie Mae and Freddie Mac.

The panel said Obama’s program should have provided legal protections for servicers that revise mortgage terms in order to reduce monthly payments for homeowners at risk of foreclosures. Servicers are companies that collect monthly payments of mortgage loans and then send them to mortgage-backed securities investors. These servicers are under contract not to implement anything that would jeopardize the profits of the investors.

These contracts between servicers and investors have been the major obstacle to loan modifications in the past. Servicers are the entities that homeowners are directly in contact with, but they do not have the full power to work out modifications.

Meanwhile, the House has approved a bill including a provision that would protect mortgage servicers from being sued if they modify loans to help borrowers troubled by foreclosures. The Senate is also expected to develop similar legislation, but several analysts are not hopeful about its passage in the Senate.

According to the Mortgage Bankers Association, 11.18 percent of mortgage loans were behind in payments by at least one month or under foreclosure at the end of 2008. The default rate soared by 2.06 percent from 2007 to a high of 7.88 percent in December2008.