The federal bailout may do little to help struggling homeowners because the US government will not have direct control of many of the home loans that need reworking to avoid foreclosure, economists and housing analysts say.
Under the plan, the government will buy troubled mortgages directly and rework them to the owners' benefit, or buy securities that are tied to large pools of home loans that were packaged as investments by Wall Street firms. Many industry analysts predict that the bulk of the $700 billion in the bailout will be spent on buying securities, not home loans.
However, the ownership interests in those pools of mortgages are split among dozens, sometimes hundreds, of investors, and the US government is unlikely to own a large-enough piece of a given pool of mortgages to be able to order the companies servicing the loans to change their terms. And it is also unlikely to get enough of the other security holders in the mortgage pool, or trust, as they are known, to agree to changes, say housing specialists.
Harvard law professor Howell Jackson said the federal government "probably won't have enough leverage to force change" because ownership of the mortgages is "broken up into too many pieces to reassemble."
But Steve Adamske, spokesman for US Representative Barney Frank, who led the bailout legislation in the House, said Congress is expecting the government to own enough of some mortgage pools to be able to dictate changes to loan terms.
And in those cases where the United States owns only a fraction of a mortgage pool, then the government's tactic will be "more a matter of pressure," Adamske said, to persuade loan servicers to rework terms to where borrowers can afford the payments.
"If the servicing industry continues to be an impediment to refinancing loans, we are going to look into this industry as a matter of policy," Adamske warned. "We will look into this to see what the impediments are to refinancing and if it comes down to the servicing industry, we could regulate if necessary."
Kim Reuben, a public finance economist with the Urban Institute in Washington, D.C., predicted that the companies involved in the mortgages will see the political writing on the wall. "There is already movement in the private sector holding the securities to understand they are going to have to negotiate," said Reuben.
Threats or politics aside, industry officials and housing groups said many of the companies administering the loans have their hands tied by contractual language that prevents mortgage terms from being altered.
"There's existing contracts between servicers and security holders and violating those contracts raises concerns, especially if the government is leaning on whomever it may be to work outside the contracts," said John Mechem, spokesman for the Mortgage Bankers Association.
For now, he said, the industry is waiting for more details of how the bailout plan will operate. The lengthy bailout legislation includes five pages intended to stem the tide of foreclosures sweeping the nation; more than 2 million foreclosure proceedings were brought against delinquent borrowers through August this year, according to real estate tracker RealtyTrac.com.
The legislation authorizes the US Treasury to try a number of steps to "maximize assistance to homeowners," including buying loans directly and rewriting terms to where borrowers can afford them, or encouraging lenders to refinance delinquent borrowers into fixed-rate, government-insured mortgages.
One model many specialists point to is the Federal Deposit Insurance Corporation's current workout of
Sheila Bair, FDIC chairwoman, announced in August that her agency would systematically modify thousands of troubled mortgages of IndyMac customers to affordable rates.
But as conservator of the bank, FDIC has control over the loans as well as an interest in minimizing the government's potential losses in the takeover by preventing foreclosures.
As in the IndyMac case, the government is directed by the bailout legislation to modify loans by either getting interest rates reduced, the principal balances written down, or the terms of the loans extended.
And the government is also instructed "where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease."
But Sharon Price, director of policy for the National Housing Conference, an advocacy group based in Washington, D.C., noted how the wording of the legislation is squishy.
"There's lots of words, no 'musts' or 'shalls' but lots of 'shoulds' and 'mays,' " she said. "There will be some more leverage to help homeowners, but there are no requirements."
Jenifer B. McKim can be reached at firstname.lastname@example.org.