Project Lifeline Really Project Band-Aid

Will an extra 30 days really buy Americans enough time to avoid foreclosure?

By + More

With much fanfare, Treasury Secretary Henry Paulson this week announced yet another plan to stem the tide of some 1 million foreclosures expected this year. This time, six major mortgage lenders will tack an extra 30 days onto the grace period delinquent borrowers have to get up to date on their mortgages before foreclosure proceedings are started.

The six big banks who've signed up for the program, including Bank of America, Citigroup, Countrywide Finance, JPMorgan Chase, Washington Mutual, and Wells Fargo, represent about half of all outstanding mortgages. Each will send a letter to truant borrowers detailing how they can "pause" the foreclosure process for 30 days while the bank evaluates whether they're eligible to modify their loan on better terms.

In principle, the idea sounds reasonable. That is, if borrowers are in a reasonable state of mind. Unfortunately, however, many continue to put off reality and simply sit around and wait to be evicted. Indeed, those on the front lines of the foreclosure disaster say the biggest issue they face is persuading homeowners to pick up the phone and ask for help. Take, for example, the toll-free hotline announced last fall by the Bush administration to offer borrowers help in working out their loan troubles. According to today's Wall Street Journal, a mere 36,000 borrowers have called over the past two months, and fewer than a third of those have actually gotten far enough along in the conversation to get advice for a loan workout. A rate-freeze program announced around the same time has been similarly underutilized.

To be sure, many of those who have actually bothered to call their lenders initially found themselves put on hold as lenders simultaneously attempted to lower costs (by laying off the workers who manned them) while ramping up efforts to field and process the workout requests. Lenders now say they're not only ready and waiting but actively reaching out to delinquent borrowers. The only trouble is, few are bothering to answer the call.

Whether a snail-mail letter asking them to do just that—and within 10 days—will flood the phone lines is doubtful, especially when you consider that they must also agree to enter homeowner "counseling"—probably a nonstarter for chronic credit abusers.

For his part, Secretary Paulson acknowledged that this latest effort isn't a "silver bullet that will undo the excesses of the past years." Some housing economists argue that the only thing that will motivate delinquent borrowers is for housing prices to stop falling, which would allow more homeowners to refinance and, perhaps more important, give them some incentive to stick it out.

That many are deciding to bolt as prices fall is only a "rational response," University of California economist James D. Hamilton notes on his Econobrowser blog. He points to a just published Federal Reserve paper (.pdf), which suggests that loose lending standards of the past several years created "a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages." If that's true, then Project Lifeline "will be helpful only if house prices are finished falling," Hamilton concludes.

Given the unlikelihood of that happening anytime soon, this latest foreclosure-fighting plan might better be named "Project Band-Aid."