Those on the frontlines of the foreclosure crisis locally are saying many who struggle to make their mortgage payments in the neighborhood may not be helped by President Barack Obama's new Homeowner Affordability and Stability Plan, announced last week.
"There's not much to be optimistic about," said Bruce Marks of the Neighborhood Assistance Corporation of American (NACA).
Many details of Obama's plan had not been made public by the time the Reporter went to press, but those that had inspired some to call the effort "wimpy" and others to take hope that Obama will learn from his mistakes.
The plan has three main components. Firstly, it will allow homeowners with loans guaranteed by or directly from Fannie Mae and Freddie Mac to refinance, even if they still owe more than 80 percent of their mortgage. A second facet would combine lower interest rates from a lender and matching government funds to reduce a borrower's payments to 31 percent of his or her income for five years, after which they would be gradually returned to their original amounts. It also gives cash incentives to mortgage holders to reach borrowers before they fall behind. Third, the federal government is bolstering Fannie Mae and Freddie Mac by buying $200 billion in preferred stock, $100 billion from each.
The plan also includes a number of other smaller measures, such as a $1.5 billion fund to relocate renters displaced by foreclosures.
Because home values in Dorchester and Mattapan have fallen so fast, restrictions on the refinancing part of the plan may keep it out of reach of virtually every struggling homeowner in the neighborhood.
"It's going to have a very limited impact," said Marks, "Number one, [to refinance with Fannie Mae or Freddie Mac under the plan] it has a 105 percent loan to value ratio. So if you have a $210,000 mortgage, the value can't be less than $200,000. That excludes virtually everyone, so the refinancing doesn't work."
The median price of single-family home sales in Dorchester for the month of January 2009, according to the Warren Group, has fallen some 35 percent under the figure recorded for January 2008. More specifically, it has plummeted from $365,000 to $237,000. Not since 2002 has the median sales price been at a comparable level.
Mattapan's numbers are similar, if not more precipitous, though the low number of recent sales in that neighborhood makes the median sales price there more erratic from month to month.
"It doesn't take a rocket scientist to realize nobody's going to be able to get $400,000 for a single-family anytime soon," said Percy Stallworth, a foreclosure prevention counselor at ESAC in Jamaica Plain. "A lot of these loans were founded with fraud appraisals at the outset."
Stallworth estimated that 90 or 95 percent of the homes of the clients he helps were 'underwater,' or worth less than the mortgage that is owed on them. He said without the opportunity of reducing the principal on these loans many people simply walk away because they cannot foresee a day when they will recoup their investment.
"If they're still saddled with the principal debt, I don't know how much relief that's going to give people," said Stallworth.
A positive trend shown in the plan, many agree, is that several components begin to address borrowers who are in trouble financially but haven't yet missed a payment. Some counselors and lenders have been forced to tell those asking for help to come back when they're behind on their payments. The new plan gives incentives to servicers to locate and refinance financially troubled borrowers early, and allows borrowers who are current to take advantage of the Stability Initiative.
"To get help under the plan you don't have to be 90 days late," said Aaron Gornstein of the Citizens' Housing and Planning Association.
Gornstein said the second part of the plan, which both asks lenders to temporarily cut back their interest rates and gives government funding to pay the difference to bring them down even further, could be helpful.
"It puts $75 billion toward reducing the interest rate on mortgages down to an affordable rate - 31 percent of income," he said. "A lot of people are defaulting primarily because it was never set at a sustainable rate in the first place. But this is still voluntary [for the lenders], and we don't know how all the details would work out."
To qualify for this part of the plan, the borrower's mortgage holder would have to first voluntarily lower the mortgage to 38 percent of the borrower's income, and the plan would then pay the lender the remainder to bring it down to 31 percent.
Another potential pitfall is that these loan modifications only last for five years, and would fall back to original interest levels - possibly in steps - after that time is up.
"They are inserting predatory terms because their mortgage payments are going to go up by hundreds of dollars in five years," said Marks. "I don't think that's a lot to be optimistic about."
The Obama Administration is rolling out the plan on March 4, and more details are expected with the plan. So far it describes no income threshold for these modifications, nor any credit score requirements, which would be expected.
At the Massachusetts Affordable Housing Alliance, director Tom Callahan is braced by the third part of the plan, which seeks to give new strength to Fannie Mae and Freddie Mac. The financial world not too long ago was looking at the possible demise or reorganization of the two mortgage-lending giants as their worth plummeted along with that of their toxic assets. But the $200 billion from the federal government is a signal of Obama's faith in them, said Callahan.
"We think Fannie Mae and Freddie Mac before the crisis played an important role in helping banks recycle mortgages to low and middle income individuals made under the Community Reinvestment Act. In some cases those loans don't have an easy secondary market. This might be the first indication that the Obama Administration sees a continuing role for Fannie and Freddie."
And many who are watching the situation do still have faith in Obama's ability to deal with the foreclosure crisis, despite criticism of the plan. "Obama is an intelligent individual," said Marks. "When he finds out he makes mistakes, he will correct them. That's our hope."