Thought Theater

Housing Crisis: "Project Lifeline" Dead On Arrival genre: Econ-Recon & Polispeak

For homeowners facing rising interest rates, higher payments, and dwindling or nonexistent equity, the roll out of "Project Lifeline" seems little more than a "dying by inches" strategy. The plan's 30-day freeze on foreclosures seems to be the equivalent of offering a band-aid to a patient in need of an organ transplant.

Project Lifeline is premised on the notion that granting homeowners a 30 day reprieve will lead them to contact their lender and provide some new financial information that will magically alter their grave situation such that the lender will forego the completion of foreclosure proceedings.

Feb. 12 (Bloomberg) -- Bank of America Corp., Citigroup Inc. and four other U.S. lenders agreed with Treasury Secretary Henry Paulson to take new steps to help borrowers in danger of foreclosure stay in their homes.

Paulson and the banks offered a 30-day freeze on some foreclosures while loan modifications are considered. The Treasury chief, with Housing and Urban Development Secretary Alphonso Jackson, said today at a news conference in Washington that "Project Lifeline" would help stabilize communities disrupted by mortgage defaults.

"If someone is willing to make a call, to reach out, there's a chance they can save their home," Paulson said. "As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures."

In a statement, the banks said the program would start with a letter to homeowners more than 90 days delinquent on payments that lays out procedures for them to "pause" the foreclosure process. The homeowner has 10 days to respond to the notice and give additional financial information so the lender is able to weigh new payment options.

Having worked in commercial real estate through the Savings & Loan scandal of the late 80's, my cynicism was piqued by the announcement of this plan. In truth, I suspect most delinquent homeowners with some mathematical potential to save their homes have already contacted their lender in the hopes of renegotiating. Those homeowners who haven't spoken to their lender are apt to already know they lack the financial means to forestall foreclosure or to withstand the terms of a restructure that may provide some minimal relief. Further, most lenders already know what I've just stated.

So the unasked question remains, "What is this plan really intended to achieve?" I'll posit two answers. First, the lenders participating in this plan are themselves in dire straits and the Bush administration, the Federal Reserve, the U.S. Treasury, and the Department of Housing and Urban Development know as much. Given the desire to avoid expanding recessionary pressures, it behooves the government and these lenders to slow the flow of home foreclosures. More bad news on the precipice of a recession simply accelerates the speed with which the economy falls further into recession. Thus, the plan hopes to blunt the bad news.

Secondarily, banking disclosure provisions require lenders to account for bad loans and to maintain acceptable loss ratios to remain viable. Should these huge institutions fall short on these formulas, an injection of additional capital is frequently required. Absent the ability to meet these capital calls, these lenders face insolvency and regulatory intervention...the very events that preceded the S&L fiasco and the subsequent creation of the Resolution Trust Corporation (RTC)...the entity charged with the management and administration of failed S&L's, the bad loans they held, and the liquidation of the properties associated with those loans.

Given the huge amount of capital that has already been injected to stabilize the industry, I suspect the powers that be fear the impact of announcing even more stopgap capital infusions. If my hypothesis is correct, then my characterization of the situation as "death by inches" is certainly appropriate.

There's no doubt the governments' hands-off approach to regulatory oversight clearly enabled the industry's careless and shortsighted practices. Truth be told, the government and the lending industry subsequently underestimated (or chose to bury their heads in the sand) the magnitude of the crisis. Too little has been done too late to solve the problems or to quell the growing consumer fears that hasten the trajectory of the recessionary spiral. Further half-measures to right the ship will only prolong the inevitable and heighten consumer mistrust.

A look into the pipeline simply indicates more bad news is on the way.

Federal Reserve officials project about 2 million homeowners face higher mortgage rates over the next two years as their loans reset higher. Economists at the Federal Deposit Insurance Corp. estimate foreclosures this year will be about 1 million more than average, a level that FDIC Chairman Sheila Bair has said "is just too high." They average about 600,000 in a typical year.

"This [Project Lifeline] is good, but we've seen this over and over again," said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington. "The fact that they keep having to roll out subsequent rescue plans every few weeks underscores that each plan is inadequate."

I'll close with an observation relative to the 2008 election. George Bush's pattern of ignoring the economic warnings and the opinions of his underlings...coupled with his new focus upon bolstering his "fiscal conservative" legacy...may serve to enhance the Democrats' argument that voters can ill-afford the continuance of a Republican in the White House.

Each time the President asserts that the economy is sound and will soon weather the storm...and then has to backpedal...he risks placing his fellow Republicans in the unenviable position of asking voters to send them back to Washington smack-dab in the middle of an economic shitstorm.

Not only is Project Lifeline apt to be dead on arrival, the intransigent leader of the GOP may be unknowingly orchestrating his party's death march...one stubborn George W. Bush inch at a time.

Comments

1 On February 12, 2008 at 7:19 PM, Jackie wrote —

Lenders and how we get them to listen!
As many borrowers know from their own experience is that the resistance from
their lender is high and just getting through to the appropriate person is very
difficult. However, when MyRecast is
involved it seems as if the calls start to get answered and the letters are
responded to. On our MyRecast Team we have the best HUD advisors involved, state
wide attorney representation and the BEST sub-prime underwriters to QC / and
audit the original files.
We use powerful laws like the Truth in Lending Act (TILA) and the Real Estate
and Settlement Procedures Act (RESPA) to bring lenders to their knees. So,
naturally, the lenders will be very amicable to working and negotiating with
MyRecast Team for a modification of the note and work out to more
affordable terms to avoid costly
litigation. Not to mention your credit and
how this will affect your ability in the future.
Jackie

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» Housing Crisis: "Project Lifeline" Dead On Arrival from www.buzzflash.net
The latest effort to assist homeowners facing foreclosure seems to be the equivalent of “death by inches”. I suspect “Project Lifeline” isn’t so much an effort to toss consumers a lifeline as it is an attempt to keep the giant mortgage lenders afloat. ... [Read More]

Tracked on February 12, 2008 5:35 PM

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