The plan constructed by six major mortgage lenders to aid homeowners and stem the flow of foreclosures has been met with skepticism by market participants. They are questioning the extent to which the proposal will actually help troubled borrowers.
Announced on Feb. 12, Project Lifeline is designed to help borrowers who are most imminently facing the prospect of losing their homes by temporarily halting the foreclosure proceedings by 30 days. The borrowers, who are 90 days or more delinquent on their mortgage payments, would then have the opportunity to be evaluated for a potential loan modification.
The program was started by the HOPE NOW Alliance, the Bush Administration's private sector group that was launched in December to help struggling borrowers. Six of the biggest mortgage lenders - Bank of America, Chase, Citigroup, Countrywide Financial, Washington Mutual and Wells Fargo - are participating in the program.
The initiative is designed to help all borrowers, and not just those who took out subprime loans. The six mortgage lenders comprising Project Lifeline account for roughly 50% of mortgages.
Floyd Robinson, president of Bank of America's consumer real estate and insurance servicers group, would not estimate how many borrowers will be helped by the program but some in the industry are already questioning whether 30 days will provide enough time to affectively hold off a pending foreclosure.
Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling (NFCC), said that when borrowers are 90 days delinquent it could signal that they have had a "major event" happen in their lives, such as a job loss. In these cases, she said, it's questionable whether a short extension will bring relief since they most likely cannot afford their loans.
"Any collaboration between the government and the private sector is a positive step," Cunningham said. "But will an additional 30 days really help? I guess more time won't hurt, but you have to remember that a good chunk of those people weren't meant to be eligible for homeownership."
But during a press conference held last Tuesday, Treasury Secretary Henry Paulson was asked whether there was a moral limit to the number of homeowners that should be helped, and he responded that the initiative was never meant to help all borrowers.
"I'm not putting this in moral terms; there is an economic limit," he said. "If you can't afford to be in a home, you will just go back to being a renter."
While Paulson would also not estimate the number of homeowners that will be helped by Project Lifeline, he said the number of foreclosures could be so steep that "everyone we save will make a difference."
But in a research note released by Barclays Capital on the day the plan was announced, analysts at the firm estimated that only a small fraction of loans will actually be paused, resulting in only a negligible overall effect on losses. The analysts questioned whether 30 days would be ample time to determine whether borrowers who are 90 days delinquent on their mortgages would be eligible for a loan mod.
"There is no mention of forbearance plans (in the true sense) in the proposal, nor does it guarantee a loan modification," the analysts wrote. "The program is not a foreclosure moratorium, but a case-by-case pause, where appropriate."
Barclays did argue that the proposal could "potentially reduce the risk of more onerous regulations." The NFCC's Cunningham also sees potential for the program to yield benefits, though for a different reason.
"If you give them an extension of 30 days, that may spur them into contacting their servicer to work out a modification plan," she said.
One of the major roadblocks toward helping homeowners that is often cited by the servicing industry is the difficulty in contacting their borrowers. "Successful outcomes are possible when servicers are able to establish contact with homeowners," BofA's Robinson said at the press conference. "[The borrowers] must respond when contacted. When we've been contacted, we should be ready to help."
When pressed about whether Bank of America would be willing to write down 30% of the loans for delinquent borrowers, Robinson said the bank would look at each mortgage on a case-by-case basis. Still, he admitted that this practice would be difficult in the more expensive coastal areas because of the severe home price depreciation.
Even as some market participants doubted the impact of Project Lifeline, Alphonso Jackson, secretary of the U.S. Department of Housing and Urban Development, said the program will allow many families to "temporarily pause the foreclosure process long enough to find a way out." But he also added that it will take a "series of solutions" to help the massive housing crisis.
Paulson delivered an even more dire assessment of the challenge facing the market: "The worst is just beginning," he said.
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