Banks Could Be Biggest Winners in Obama's New Foreclosure Plan

AMY GOODMAN: The Obama administration has announced changes to its signature foreclosure prevention program, Making Home Affordable. The initial foreclosure relief program unveiled a year ago was supposed to help up to four million struggling homeowners. So far fewer than 200,000 borrowers have been granted permanent loan modifications. Meanwhile, a record 2.8 million properties with mortgages received foreclosure notices last year, this according to RealtyTrac.

The steps announced Friday would broaden the program to include people who’ve lost jobs, encourage lenders to reduce the principal balances on problem mortgages, and help refinance borrowers who are “underwater,” or owe more than their homes are worth. But will these changes help stem the tide of foreclosures?

In a statement this weekend, economist Dean Baker said the plan was well-intentioned, but the winners are likely once again to be the banks. Baker is the co-director of the Center for Economic and Policy Research and the author of a number of books, his latest called False Profits: Recovering from the Bubble Economy.

He joins us now from Washington, DC, and then we’ll go to Tavis Smiley in Burbank, California, to talk about President Obama’s trip to Afghanistan.

But Dean Baker, one in five American homeowners are now underwater? What does that mean? And talk about what the Obama administration plans to do about it.

DEAN BAKER: Well, the basic story is, we had a housing bubble, prices have fallen, they’re continuing to fall, and we had a situation where people were borrowing very heavily both to buy their homes and also, in many cases, they were taking equity out of their homes. That was a reasonable thing to do if the bubble was real, in other words, if prices were going to continue to rise, as people like Alan Greenspan and Ben Bernanke were telling them. So now that prices have reversed, we have this situation where all these people owe more than the value of their house.

And the important thing, and this is just amazing to me, that no one seems to want to talk about the bubble, even after it’s wrecked the economy, put us in this situation. And they design a housing plan that acts as though there was no bubble, there is no bubble, there’s no problem with house prices falling. Now, house prices are virtually certain to continue to fall, not everywhere, but in very many of these markets. So, if we have a homeowner who’s underwater, their house price is going to fall further, we get the federal government to give some money to the banks to allow them to stay in their home another year or two years. Well, odds are that we aren’t really helping that person. They’re paying more on their mortgage than they would to rent the same house. And on top of that, at the end of the day, they’re going to end up with no equity in their home anyhow. So I don’t quite understand what’s wrong with people in this town, that you had an $8 trillion bubble, it wrecked the economy, the worst downturn since the Great Depression, and people still can’t talk about the bubble. It’s bizarre.

AMY GOODMAN: So talk about exactly what the plan is, who it will help and who it won’t help.

DEAN BAKER: Well, it’s a—first off, I mean, the important thing to understand is everything here is voluntary on the part of lenders, so it sets up a formula where, if lenders reduce principal, in some cases, that the government will issue a new mortgage, or I should say guarantee a new mortgage, at a lower principal. So say someone currently owes $300,000 on a home that we’ll say is worth $250,000. If the bank is willing to issue a new mortgage at, let’s say, $250,000—it’d be a little less, say $240,000—then the Federal Housing Authority will guarantee that new mortgage. So that would mean the person will be paying less than their mortgage each month. In principle, they could come out ahead. But again, in many of these markets, prices are still falling. So let’s say the home’s worth $250,000 today. A year from now it might be worth $225,000. And at that point, the person is again underwater, and the taxpayers are on the hook for the difference. Haven’t helped the person, you’ve helped the bank.