Homeowners who modified loans are in trouble again

Broader response to foreclosure crisis urged

Industry, government officials debate broader response to foreclosure crisis

• Alan Zibel, AP Real Estate Writer

• Monday December 8, 2008, 4:20 pm EST

WASHINGTON (AP) -- A top House Democrat threatened Monday to tie up the remaining half of the $700 billion financial industry rescue money unless the Bush administration provides some of it for borrowers facing foreclosure.

"They're not going to get the (money) unless they get very serious about the foreclosure modifications and showing us how we're going to get some lending out of the banks," Rep. Barney Frank, D-Mass., told reporters after speaking at a housing industry conference in Washington. "At this point I don't see that happening."

The Treasury Department says $335 billion has been allocated from the first half of the $700 billion program, which was enacted on Oct. 3. Treasury Secretary Henry Paulson, who is overseeing the program, is weighing tapping the second $350 billion. The main goal of the program is to get financial institutions to lend money more freely again, which would help revive the economy.

Critics like Frank say many in the public -- and lawmakers on Capitol Hill -- were led to believe that some of the money would go to avoiding foreclosures and are frustrated that it has yet to do so.

The powerful chairman of the House Financial Services Committee told a lunchtime audience that the lack of meaningful aid for homeowners has undermined the government's other rescue efforts. American voters are "increasingly skeptical" of federal aid to major Wall Street banks and other large companies, Frank said.

Next year, after President-elect Barack Obama takes office, lawmakers plan to subsidize rental housing, reform lending practices and overhaul the regulations for companies that collect mortgage payments and distribute them to investors, Frank said. Lawmakers also should regulate the amount of debt that can be issued by hedge funds and other Wall Street firms, he added.

Neel Kashkari, director of the Treasury Department office overseeing the $700 billion program, said its primary goal is to stabilize the financial system.

"Imagine how many foreclosures we would have if the financial system had been allowed to collapse," he said in remarks to the same conference.

Meanwhile, Wall Street extended its rally for a second straight day despite news of more layoffs by a trio of large U.S. employers as investors were optimistic that Obama's plan to ramp up infrastructure spending could help boost the crippled economy. All the major indexes posted gains, including the Dow Jones industrial average, which added nearly 300 points.

Discussion at Monday's forum, sponsored by the federal Office of Thrift Supervision, focused on how broad the government's intervention should be, rather than whether the government should play any role at all. The U.S. is on track for 2.25 million foreclosures this year, more than double traditional levels.

New data released Monday show that more than half of all homeowners who had their loans modified to make the payments more affordable in the first half of the year are already in default again.

The data raise questions about whether government money may be better spent on creating jobs, rather than averting foreclosures, said John Reich, director of the federal Office of Thrift Supervision. "I do have concerns about allocating federal resources," to such an effort, he said.

But the reports aren't detailed enough to show how well the programs are working or which borrowers have been most helped, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a proponent of broadening loan assistance efforts.

"The quality of the (modifications) are not what they should be," she said.

New Jersey Gov. Jon Corzine called for a three- to six-month halt to foreclosures while the government works out a more aggressive plan. "We need a bottom-up approach ... by modifying people's mortgages and helping them stay in their homes," he said.

The U.S. economic picture has darkened over the past month. One in 10 Americans with a mortgage is either behind or in foreclosure, and more than 500,000 jobs were lost in November.

Unemployment stands at 6.7 percent, and the worldwide credit markets have only improved modestly from the freeze that led Congress to approve a $700 billion bailout before the election. On Monday, three more large U.S. employers announced layoffs.

Dow Chemical Co., based in Midland, Mich., said it will slash 5,000 jobs and shutter 20 plants to rein in costs, Maplewood, Minn.-based 3M Co. is cutting 1,800 jobs in the fourth quarter and ordering some workers to take vacation or unpaid time off for the last two weeks of the year, while Anheuser-Busch InBev said it would cut about 1,400 U.S. jobs to help save the world's largest brewer at least $1.5 billion a year.

Three-quarters of the jobs cuts will be at Anheuser's North American headquarters in St. Louis. The cuts go beyond plans Anheuser-Busch announced this summer to streamline costs, before it agreed to be taken over by InBev.

Also Monday, newspaper publisher Tribune Co. filed for bankruptcy. The privately held owner of the Los Angeles Times and Chicago Tribune, other newspapers and the Chicago Cubs and Wrigley Field, is struggling with $13 billion in debt.

Mark Zandi, chief economist at Moody's Economy.com, said the public is likely to be more sympathetic to efforts to assist troubled borrowers, because the link between the foreclosure crisis and the sinking economy is increasingly clear in the minds of most Americans.

"It's now in every corner of the country," Zandi said. "I think that people understand that this is a broader issue."

During an interview that aired Sunday on NBC's "Meet the Press," Obama declined to say how large an economic stimulus plan he envisions. He said his blueprint for recovery will include help for homeowners facing foreclosure on their mortgages if President George W. Bush has not already acted when Obama takes office next month.

For nearly a year, some consumer advocates, lawmakers and think tanks have advocated a dramatic government response. The effort, they say, should be similar to created the Home Owners' Loan Corp. in 1933 to help borrowers refinance troubled home loans during the Great Depression.

The Bush administration has focused mainly on voluntary industry efforts to modify loans, and those have not stopped the surge in foreclosures.

AP Business Writers Jeannine Aversa, Christopher S. Rugaber and Daniel Wagner contributed to this report.