Foreclosures Loom as Top Housing Problem for Obama

Washington, DC, Nov. 7, 2008--President-Elect Barack Obama's new administration will face some daunting housing problems as it tries to get the economy back on track.

But foreclosures are likely the No. 1 concern, because that problem is a big one.

According to a report from Credit Suisse, 6.5 million loans were expected to fall into foreclosure over the next five years. That's based on home prices dropping 10% in 2008 and 5% in 2009, before rising 3% in future years.

The Center for Responsible Lending estimated in August that nearly 2.2 million foreclosures would occur due to defaults on subprime loans from late 2008 through the end of 2009. More than 40 million homes in neighborhoods surrounding those foreclosures would suffer price declines as a result, causing a $352 billion total decline in property values, or an average $8,667 per home.

To combat this rash of foreclosures, attacks will have to come from several angles.

Federal and mortgage industry efforts are already underway, with various degrees of success, and will continue to evolve before Obama takes office.

Currently on the books is a Hope for Homeowners program, which went into effect last month and allows eligible homeowners struggling with their mortgage payments to refinance into an affordable loan insured by the Federal Housing Administration.

Industry efforts include the recent announcement from J. P. Morgan Chase that it would enhance its mortgage-modification program to help 400,000 additional families stay in their homes over the next two years. The company isn't putting any additional loans into the foreclosure process until the enhancements are complete -- now less than 90 days away.

The industry's Hope Now alliance also reports that it has helped to prevent over 2.5 million foreclosures in the past year, through modifications and loan workouts.

But programs in place to address the flood of foreclosures so far have been like "holding up a firefly when you need a floodlight," said Kathleen Day, spokeswoman for the Center for Responsible Lending, and she thinks the president-elect acknowledges that more needs to be done.

The excess foreclosure inventory also is hurting the rest of the country's housing stock, and curbing foreclosures will work to stabilize home prices, she added.

On the campaign trail, Obama proposed a three-month moratorium on foreclosures for banks or lenders getting money from the $700 billion federal rescue plan -- if the customer is making a good-faith effort to make payments and renegotiate the mortgage.

A foreclosure moratorium may not have much effect in the long term, said Dean Baker, co-director of the Center for Economic and Policy Research.

But bankruptcy reform, also supported by Obama, could help at least some homeowners, Baker said. The proposal would allow bankruptcy courts to modify an individual's mortgage payments; currently, bankruptcy judges are prevented from making these alterations.