Asbury Park Press

Scrambling For A Cure

Asbury Park Press — Sunday, January 18, 2009

By Michael L. Diamond

Ten months after President George W. Bush visited Novadebt in Freehold Township and touted the credit-counseling agency as the best chance to help distressed homeowners, the calls continue to flood in.

The company's counselors hear endless tales from people whose lenders are bearing down and threatening to take over their homes, said Joel Greenberg, Novadebt's president and chief executive officer.

"It's out of control," Greenberg said last week. "Overall, we just can't keep up with the demand."

The relentless wave of consumers falling behind on their mortgage payments is confounding experts, who have watched a $700 billion bailout program by the Treasury Department fall short of its goals.

It has forced them to scramble to shift gears and offer other ideas. All of them have merits. None are painless. But without a resolution, experts say home values won't stabilize, lenders won't extend credit and the economy will plunge deeper into a recession.

"There needs to be a real fix," said Phyllis Salowe-Kaye, executive director of the consumers' group New Jersey Citizen Action.

The problem in its simplest form stems from consumers who earlier this decade were approved for mortgages that spiked after a year or two to payments they couldn't afford.

By 2008, they had few options. Their incomes didn't keep pace with their mortgage payments. Their homes were beginning to lose value, so they couldn't refinance. They were left with few places to turn.

The result: New Jersey had 69,612 foreclosure filings in 2008, up 101 percent from 2007 and up 186 percent from 2006, according to RealtyTrac, a research firm in Irvine, Calif.

The scope of the problem can be seen at Novadebt, which was the site of a presidential visit last March.

The company is part of a coalition of credit counseling agencies, funded at least in part by the financial services industry, called HOPE Now.

Delinquent homeowners were encouraged to call HOPE Now, where counselors could negotiate with lenders for more affordable payments. It was left to the lenders to agree to the modification or try to foreclose.

Novadebt gets about 14,000 calls a month. About 26 percent of those calls qualify for counseling sessions. And about 60 percent of consumers who qualify for sessions wind up with mortgage modifications, usually when their lender agrees to reduce the interest rate, Greenberg said.

The scene at Novadebt crystalizes the issue: Banks loaned money to consumers who couldn't afford it. Any solution requires pain for consumers, banks or investors who own the mortgage. The question that has yet to be answered is, who should bear the most pain?

"It's extraordinarily complicated," said Patrick J. O'Keefe, a housing industry expert and a director at J.H. Cohn, a Roseland-based accounting firm.

How does the country get out of this mess? Here are some ideas:

Stay the course

The Treasury Department is managing the Troubled Asset Relief Program, which could cost $700 billion, to invest in banks and, eventually, buy toxic assets. The department also is hoping to drive down mortgage rates to less than 5 percent.

Pros: The program stabilizes banks that otherwise could have gone out of business. And it relies on free-market forces to allow homeowners to take advantage of historically low interest rates and refinance into more affordable payments.

Cons: Banks are nervous about the economy and have tightened their lending standards. Many homeowners are so deep in debt that even refinancing at historic lows can't save them.

Proponent: "It's our belief we have to get as many people to refinance as possible," said Michael Affuso, director of government relations for the New Jersey Bankers Association, a trade group.

New Jersey to the rescue

Gov. Jon S. Corzine recently signed a law that provides $25 million to stabilize mortgages. Banks would first write down a home to the market value and then work with a homeowner for an affordable payment. The state would provide a bank up to $25,000 to reduce the mortgage payment.

The plan also puts a six-month moratorium on the foreclosure process and forces homeowners and lenders to meet with a mediator. The mediator's recommendation isn't binding.

Pros: The program brings home prices back to earth and keeps families in their homes.

Cons: The program is only eligible to families with an annual income of no more than $135,000 a year. Banks participate voluntarily and would have to take a short-term loss.

Proponent: "It keeps (owners) in their homes, paying a mortgage they can afford," said Marge Della Vecchia, executive director of the New Jersey Housing and Mortgage Finance Agency. "We're willing to contribute so long as the bank is also willing to contribute to make that a reality."

Bankruptcy court

U.S. Senate Democrats want to rewrite bankruptcy law so that mortgages on homes that are headed for foreclosure would be renegotiated by a judge in U.S. Bankruptcy Court. Citigroup reportedly offered to support the idea.

Pros: The process would cut to the chase, eliminate bureaucracy and reduce foreclosures.

Cons: Banks risk taking a major hit, which could weaken their already precarious balance sheets.

Proponent: "Changing bankruptcy law is going to change (borrowers') leverage in dealing with investors," said Novadebt's Greenberg.

Extend the terms

Homeowners who can't afford payments on a 30-year mortgage could refinance and receive a loan with a lower interest rate that would be paid off in 40, 50 or even 75 years.

Pros: Borrowers get a sharp reduction in the principal they pay. Banks get more interest income. And the property could be sold at a gain when the market recovers.

Cons: Homeowners don't build as much equity.

Proponent: "The best method here is to stretch out the principal for a greater number of years," said Robert Angelone, an economist with the Epicurus Institute in Wall. "If you go from from 25 years to a 50-year program, they are cutting the principal payment in half."

Nonprofits step in

The New Jersey law makes $15 million available to nonprofit groups, which would buy troubled mortgages from investors, lower payments for owners and sell the mortgages when they begin to perform again.

The Society for the Preservation of Home Ownership, a nonprofit group in Ocean Township, plans to apply for $50 million from the TARP program and introduce a similar program.

Pros: Consumers in default could afford to stay in their homes. Foreclosures would decline.

Cons: Banks would take a loss. Residents in the state program would go from owners to renters at least until they could afford to buy the home again.

Proponent: "The money shouldn't go to the top and trickle down," said David Petrovich, executive director of the homeownership group and author of "Fight Foreclosure!" "It should be spent where it's needed the most, and that's to help distressed home owners."

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