Foreclosures to rise, whomever wins White House

Home foreclosures will keep rising next year no matter who is elected president in November.

Even the optimism that surrounds a new president taking office cannot resurrect home values overnight, and presidents have no direct ability to reduce rising mortgage rates. Nevertheless, Democrat Barack Obama and Republican John McCain both promise help for homeowners facing foreclosure.

Obama supports a broader role for government than does McCain. Both envision the Federal Housing Administration providing new, cheaper mortgages to distressed homeowners who otherwise would have difficulty refinancing into more secure government-insured loans with lower monthly payments.

For the plans to work, lenders would have to be willing to take a substantial loss by reducing the amount owed on the loan. But some would have a powerful incentive to do so. A refinancing deal could allow them to recover far more money than they would get from the costly process of foreclosing on the property and trying to resell it.

Obama supports legislation along these lines by Sen. Chris Dodd, D-Conn., that would help about 400,000 homeowners. People would not have to have good credit to qualify as long as they could show they can afford the new payments.

"If the government can bail out investment banks on Wall Street, we can extend a hand to folks who are struggling on Main Street," Obama said.

McCain's plan would provide relief to 200,000 to 400,000 homeowners. The aid would be available only to people who could show they were creditworthy when they got their original loan. The plan offers "every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home," he said.

The FHA piece of the Dodd plan would cost close to $1 billion. The money would come from diverting dollars in the early years from an affordable housing fund financed by the profits of the mortgage companies Fannie Mae and Freddie Mac. McCain's FHA provision is estimated to cost from $3 billion to $10 billion and would mean either cutting federal spending elsewhere or having the government borrow more. The first choice is to trim spending, a McCain aide said.

Experts predict foreclosures will continue to climb well into 2009. Some believe there is a chance for improvement in late 2009, but more think that will not happen until 2010.

A long-term solution is tied to a turnaround in house prices. Slumping home values are blamed for the bulk of the increasing foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth, so they walk away from their homes. Dumping more empty houses on the market adds to the pile of unsold homes, and that drives home prices down further.

"This is uncharted territory," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.

Some predict house prices will not climb until the spring selling season of 2010 - at the earliest.

Lawrence Summers, a treasury secretary in the Clinton administration, predicted that more than 2 million foreclosures are coming over the next two years and that as many as 15 million homeowners will owe more than their house is worth.

According to a recent AP-Yahoo News poll, 57 percent of people said housing prices are important to them personally. For many, their home is their biggest asset. As home prices dropped, so did people's net worth - leaving them feeling less financially secure and more gloomy about the direction of the economy.

Which candidate would do a better job of handling housing prices? In the poll, 25 percent said Obama and 17 percent thought McCain. Nearly 30 percent said neither.

Although most voters think the next president will have a "great deal" or "some" influence over housing prices, the reality is there is no quick fix.

"The odds of that are slim to none," said Cal Jillson, political science professor at Southern Methodist University. If the next president can make people more optimistic about the future, "the slow rebuilding of confidence will help to increase home values," he said.

When it comes to handling the broader economy, which is the top concern of voters, the poll found that 32 percent picked Obama and 28 percent went with McCain.

An additional factor is the Federal Reserve, which presidents do not control. If the central bank were to raise interest rates to fend off inflation, the step would increase payments for homeowners whose loan rates are resetting higher. That, in turn, could push up foreclosures. "We are very exposed to interest rate risks and mortgage payment shocks in 2009," Wachter said.

Mortgage rates, including those on 30-year home loans, already are climbing, propelled by inflation worries.

In addition to his FHA proposal, Obama wants to create a $10 billion fund to counsel distressed homeowners before they slide into foreclosure; help people sell homes they bought but could not afford; and team with state governments, community groups and lenders to ensure sure loans can be modified in a timely manner to avoid foreclosure or bankruptcy.

His approach, reflecting the traditional Democratic preference for greater government intervention, would establish a 10 percent mortgage credit for people who do not itemize their taxes. That would provide 10 million homeowners, most of whom earn less than $50,000 a year, with an average of $500 in savings, according to his campaign, and help those struggling to make mortgage payments.

Obama also supports changing bankruptcy laws so homeowners going through that process can renegotiate terms of their mortgages - just as people or investors who own multiple homes or vacation homes can do.

The Illinois senator also wants to combat mortgage fraud and improve mortgage disclosure. Deficiencies in those areas contributed to lax lending that allowed people to take out home loans that their incomes could not support, critics say.

"This kind of transparency won't just make our homeowners more secure, it will make our markets more stable, and keep our economy strong and competitive in the future," Obama said.

McCain prefers a more limited government role in dealing with the housing crisis, a position consistent with traditional GOP leanings. The other component of his plan would have the Justice Department to set up a task force to investigate possible wrongdoing in the mortgage industry. The department has been pursuing cases of fraud and other mortgage-related matters.

"In some cases, lenders and borrowers alike were caught up in the speculative frenzy that has harmed the housing market," the Arizona senator said. "And it is not the responsibility of the American public to spare them from the consequences of their own bad judgment."

Congress is working on legislation that would allow the FHA to help struggling homeowners. Differences have to be worked out between Dodd's plan, still in the Senate, and a similar House-passed proposal by Rep. Barney Frank, D-Mass., and with the White House, too. The White House has threatened a veto but is working behind the scenes with congressional leaders to find common ground.

The plans envisioned by Obama and McCain - and Congress - would deliver short-term help but are not a cure-all, housing experts said.

Long-term strategies are needed to prevent a repeat of the foreclosure crisis, experts said, and that must revamp the regulatory structure to improve oversight of players and borrowers in the mortgage finance system. The debate on such a broad overhaul has already started in Washington and will likely spill over to next president and Congress. Both Obama and McCain have indicated they favor tougher regulation.

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On the Net:

McCain: http://www.johnmccain.com/

Obama: http://www.barackobama.com