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Chicago mortgage lenders have reservations about Obama plan

by Malia Spencer
Feb 18, 2009

Chicago mortgage lenders have reservations about Obama plan

As President Barack Obama unveiled plans to tackle the nation’s mortgage crisis, Chicagoans in the home-lending business gave mixed reviews on whether the effort will do enough.

Under the plan, lenders and borrowers will both receive financial incentives for modification and prompt payment of mortgage loans. Government-controlled Fannie Mae and Freddy Mac will also get funding and would loosen regulations for refinancing.

Full eligibility details of the plan are slated to be released March 4. Government officials recommend that borrowers contact their lenders or servicers at that time.

Incentives for lenders and borrowers will come from the creation of a $75 billion Homeownership Stability Initiative, according to a statement released by the U.S. Treasury. This aspect of the plan is aimed at homeowners who are current but struggling to meet payments, bringing their monthly payments down.

Under the stability initiative lenders receive $1,000 for each eligible modification in addition to a monthly payment every month that a borrower stays current, up to $1,000 a year for three years.

If a loan is deemed to be at risk, a mortgage servicer gets $500 for each modification it makes before the borrower falls behind.  For the lender, that early outreach incentive is $1,500.

According to the Treasury, loan modifications are more successful if they occur before a payment is missed.

Art Hilliard, a Chicago mortgage banker and vice president of the Illinois Mortgage Bankers Association, noted that problems with mortgages are complicated and can’t “be fixed in one fell swoop,” but anything to bring down a borrower's monthly payment is a step in the right direction.

The question however remains, he said, how long will all of this take? Homeowners, he said, must be willing to stick with a property over the long term and monthly mortgage payments need to stay below what it would cost if the homeowner became a renter.

“If a property is upside down," the loan amount exceeding the current market value of the property,
"and they can find an apartment cheaper, there is no incentive to stay there regardless of the rate,” he cautioned.

Loan modifications spelled out by Obama will allocate government money to ensure that monthly payments do not exceed 31 percent of a homeowner’s income. Initially it will be up to the lender to bring payments down to 38 percent of monthly income and the government will pay the difference for up to five years.

After that, the rates could gradually increase to the conforming loan rate at the time the loan was modified.

Officials at Fifth Third Bancorp welcomed Wednesday’s announcement and noted that for the most part the plan along with other government programs such as the economic stimulus package and the Economic Stabilization Act will all begin to help right the economy.

“We are one of the largest lenders in the market. We originate Fannie and Freddy loans as well as FHA loans and certainly as these programs become available we will be immediately offering them to the public,” said Howard Ackerman, senior vice president of mortgage lending.

For his part, Hilliard noted that lending practices have already changed with standards tightening up. He said he is hearing of people with 720 credit scores needing cash reserves to get loans. 

Frank Binetti, a Chicago mortgage banker and president of the Illinois Mortgage Bankers Association, said that despite the lack of detail released, he hopes the plan will help people regain confidence and get the public back in the housing market.

If anything, the current crisis has Americans going back to the old idea of homeownership, he added.

“A home is a home again,” he said. “It’s not an investment vehicle.”

For borrowers who stay current, the initiative provides a monthly balance-reduction payment of $1,000 a year for up to five years.

One critic of the plan, Danielle Babb, author and dean of Andrew Jackson University School of Business, said many banks have already been modifying mortgages and she is concerned about how long the government is committing to paying the difference in interest rates.

And even with government help and lower interest rates, Babb and Hilliard noted, some borrowers will still default either because they still will not be able to consistently make payments or homes will continue to lose value.

One aspect of the plan that drew universal fire from lenders came under the heading of “strengthening communities” and allows bankruptcy-court modification of home mortgages for borrowers who have run out of options.

“The worse thing is to force bankruptcy judges to write down principle,” Babb said, adding that judicial write- downs would force reductions of bank assets and in turn force the banks to raise fees on new loans, further pushing lending out of reach.

Fifth Third’s Ackerman added that most mortgage bankers are against the judicial action because it can erode the investment legitimacy of investing in mortgage-backed securities in the future.

To boost confidence in Fannie Mae and Freddy Mac, the Treasury stated, the government will add further to the increased funding of those agencies authorized last year by Congress. The Treasury is increasing its preferred stock purchase agreements to the agencies to $200 billion each, up from $100 billion each.

Additionally, the Treasury will continue to buy mortgage-backed securities from the agencies, which Babb considered one positive aspect of Obama’s announcement. Purchasing those securities, she said, could free up credit for the banks to lend.

Kate Shellnutt contributed.