Housing relief: Help, but for how many?

Sponsors of the Senate's bipartisan mortgage bill say it will help 500,000 people. But an Oct. 1 start date means many homeowners could be out of luck.

By Jeanne Sahadi, CNNMoney.com senior writer
May 23, 2008: 10:39 AM EDT

NEW YORK (CNNMoney.com) -- When the Senate Banking Committee passed a housing bill intended to limit foreclosures, panel Chairman Christopher Dodd, D-Conn., said he expected the measure could help 500,000 borrowers stay in their homes.

While the bill could help a lot of people, it's unlikely to help 500,000.

The bill's key provision would allow the Federal Housing Administration (FHA) to insure up to $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers' homes.

The Congressional Budget Office has not yet released its official estimates of the bill's FHA proposal.

But in analyzing the potential costs and reach of a similar proposal passed by the House in May, the CBO estimated that 500,000 borrowers may enter the program - and that 35% of them could still default. So the best estimate of the net number of borrowers who will stay in their homes under the program is 325,000.

That would reduce anticipated foreclosure filings by 8% over the next few years, according to an estimate from Goldman Sachs analyst Alec Phillips.

That's not the only factor that could reduce the number of homeowners helped by the Senate bill. In making its estimates, the CBO assumed a June 1 start date for the FHA program. But the Senate version of the legislation - considered more politically viable than the House bill - would start the program on Oct. 1.

That four-month difference is likely to flush from consideration a segment of the bill's immediate target group: the 1.5 million subprime borrowers with adjustable-rate mortgages (ARM) whose loans are scheduled to reset in 2008.

Come Oct. 1, many of those whose ARMs reset between January and May might have already had their homes repossessed or left them during the foreclosure process.

Typically foreclosure proceedings begin after a mortgage payment is 90 days past due. Homeowners who are unable to reach deals with their lenders for more affordable loans may lose their homes within three or four months after the 90-day delinquency period, said Rick Sharga, vice president of marketing for Realty Trac, which publishes foreclosure data.

So those whose rate reset on Jan. 1 could lose their home by June or July. Likewise, anyone whose rate reset in February, March, and April could lose their homes before the new FHA program would go into effect. Some portion of those whose rates reset in May - one of the peak months for subprime ARM resets - could be in the same boat.

"The people the bill will most likely help are those resetting in the third quarter and beyond." Sharga said. "The people who reset in the first quarter will almost certainly be beyond help."

In some states, however, it takes as long as a year to go through the whole foreclosure process, giving some borrowers whose loans reset early in the year a potential chance to use the Senate-proposed version of the FHA program should it become law.

A congressional plan to limit foreclosures would have been most effective if it caught more subprime borrowers before their rates reset. That's because the repossession rate on homes of borrowers with subprime ARMs rises dramatically after reset, according to First American CoreLogic LoanPerformance data from the past decade. The same holds true when considering foreclosure filings and repossessions combined.

Of course, choosing a start date for the FHA program isn't just a matter of figuring out how to limit the maximum number of foreclosures. "There's upfront planning that needs to occur for this to be successful," said Jaret Seiberg, an analyst with the Stanford Group, a Washington policy research firm.

And then there's the political calculus. The bill has been the source of heated wrangling between Democrats and Republicans, which has delayed its path to enactment.

"At the end of the day you compromise to get legislation enacted. But it's better to start the program later than have it lie dead in the Senate."