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California, no longer the dream state

admin — Mon, 16 Mar 2009 16:55:19 +0000

Nation’s most populous state dealing with high jobless rate

CONCORD, CA - DECEMBER 17: Job seekers wait in line to enter the "Put Your Talent to Work" job and resource expo

California, a state so large that its economy dwarfs most nations, now has another, less cheery, claim to fame: It is one of the states hardest hit by the country’s unemployment woes.

The California jobless rate hit 10.1 percent in January, up from 5.9 percent when the recession began in December 2007. Only Michigan, South Carolina and Rhode Island reported a higher unemployment rate for the first month of the new year, when the national average was 7.6 percent.

While other states with exceptionally high unemployment rates are suffering from severe downturns in specific sectors that power their economies — such as Michigan’s auto industry — in California, the state is dealing with a broad array of problems, more similar to the country as a whole, economists say.

If you follow the trend of our employment compared to the national employment, it tracks it pretty closely,” said Michael Bernick, former director of the state Employment Development Department and now a labor lawyer. “It’s gone up sharply just as the national rate has, and we’ve continually been higher than the national rate.”

To find one big reason why, you need look no further than the foreclosure signs that line the streets in many of the state’s suburbs and exurbs.

California enjoyed one of the hottest housing markets in the country during the boom, and it was one of the first and hardest-hit by the housing bust. As foreclosures have mounted and homebuilding has dried up, the state has shed construction jobs at an alarming rate. It lost about 130,000 construction jobs from January 2008 through January 2009 alone, according to preliminary calculations from state officials.

But California’s economic woes have spread into other areas as well. The state’s manufacturing sector has shed more than 80,000 jobs over the same period, and its financial sector has cut more than 48,000 jobs, according to the preliminary state data. That’s creating a tough job market for every class of worker, from unskilled laborers to white-collar college graduates.

“It goes across sectors,” said Bernick, adding that it has become common for as many as 40 people to apply for one job opening.

Some argue that the state’s jobless picture may be less bleak than it appears. Howard Roth, chief economist for the state’s Department of Finance, said a change in the way the U.S. Bureau of Labor Statistics calculates the jobless rate has often meant that the state’s monthly numbers initially appear worse than they are, only to be revised later.

Still he acknowledges that California’s jobless rate is likely to remain higher than the rest of the country as it continues to feel the recession more profoundly.

In addition to the housing bust, the state’s financial sector has been hit by the banking crisis, and its many businesses are grappling with the effects of the credit crunch that has squeezed access to financing.

Other sectors of the economy, including technology and tourism, also are suffering as people pull back on spending. The manufacturing industry downturn could be problematic because California’s high cost of land, electricity and other resources make it a less attractive place to locate.

“It’s pretty expensive to manufacture something in California,” Roth said.

The state government also is suffering from a severe budget crunch, which could eventually result in public-sector jobs being cut and further the cycle of economic worries. A 3-year-old drought is hurting the agriculture industry, which Roth said accounts for 5 percent of the state’s economy.

The healthcare and education sector is one of the few bright spots in the state’s bleak jobs picture, and even that sector isn’t faring as well as some would hope.

This is a state that people come to
Steven Levy, of the Center for the Continuing Study of the California Economy, believes one major reason the state’s jobless rate comes in higher than the rest of the nation’s is because of a constant influx of new immigrants. He estimates that about 200,000 new legal immigrants come to the state each year, and in this market he says many of those workers may have immediately joined the ranks of the unemployed. The state data shows that more than 300,000 people were added to the labor force last year.

“The unemployment rate is higher because this is a state that people come to,” Levy said.

On the other hand, Levy believes unskilled immigrants who entered the country illegally are probably returning home because work is drying up.

Levy expects the state’s jobless rate to continue to edge up, and he warns that it could take some time for things to stabilize and eventually turn around.

“We’re no different than the nation — the numbers are going to get worse before they get better,” he said.

Still, he and other economists take solace in the fact that the state rebounded quickly and powerfully from other recessions including the downturn in the 1980s when it was hit especially hard because of steep cuts to its aerospace industry.

This time around, the job cuts are much more widespread, but they also have come at a much faster pace than in previous recessions.

The government stimulus package may help stem job losses, although some don’t expect it to be a major job creator. Bernick says the state should benefit from its diverse economy as well as a history of entrepreneurship.

“We do have high costs, (traffic) congestion (and) higher taxes, but we have such an entrepreneurial ethos and entrepreneurial culture — and part of that’s an immigrant culture — and that’s really what keeps the economy afloat and would be our hope for the future,” Bernick said.

California economists also note that past recessions brought on doomsday talk of permanently high unemployment rates and other long-term woes for the state, none of which came to fruition. This time around, the state is expected to recover more slowly than in recessions past, but most still see better times ahead.

“I’m pretty confident that we’ll come out of it. We’re pretty resourceful people,” said Roth, the state economist. “But for now, it’s a little hard to forecast exactly when that will happen.”

Renters in limbo as porperty owner defaults on loans

admin — Mon, 16 Mar 2009 16:11:44 +0000

Large apartment complexes abandoned to receivership and unruly weeds

Chandler, Ariz., police officers confront residents of the Alante at the Islands apartment complex last week at a meeting called to discuss what the renters would do next.

Nicholle Krause first noticed the weeds sprouting in the usually well-manicured grounds of her 320-unit apartment complex in Chandler, Ariz., in December. Soon, signs of neglect began multiplying: Garbage spilled over from the dumpsters, the water in the swimming pool turned a slimy pea green and the grounds were infested by swarms of bees — especially alarming because Krause is severely allergic to bee stings.

“I couldn’t even go outside to enjoy where I live,” said Krause, a 21-year-old office worker who pays $827 a month for a one-bedroom apartment with garage space. “I shouldn’t have to pay $800 a month to live in a … hole.”

It wasn’t until early March that Krause and other residents learned why the complex – the alluringly named Alante at the Islands — was rapidly going to seed. The property owner, Irvine, Calif.-based Bethany Holdings Group, had abandoned the complex and a dozen other large rental properties in the greater Phoenix area after defaulting on hundreds of millions of dollars in loans.

As panicked renters in Arizona began holding public meetings to explore whether they could walk away from leases, recoup security deposits or sue, it became clear that the scale

of the mess was far larger than they had realized. Companies under the Bethany umbrella owned at least 60 — and possibly many more — large residential complexes across the nation, all of which are now believed to be in bankruptcy or receivership, potentially affecting tens of thousands of renters.

The Bethany Group meltdown highlights how few protections exist for renters caught in the foreclosure crisis. That’s a situation that some experts say is becoming much more common.

“People were paying attention to the single family resident market, the 100 percent, no-down loans,” said West Coast real estate investor and broker Virgil Hobbs, who is bidding on some of the distressed Bethany properties on behalf of clients. “And then beyond that wave is the commercial market, which is what you’re now seeing now.”

When commercial residential properties change hands, tenants typically don’t feel much impact. But in this case, where properties were simply abandoned, the situation was chaotic.

Threats of utility shut-offs
In one abandoned Bethany property — the 500-plus-unit Granite Bay in Phoenix — tenants were served notice by the water company on March 6 that their water would be shut off in five days because of an outstanding $64,000 bill. Alarmed residents only found out shortly before the deadline that a Las Vegas company, 707 Management Services Inc., had been appointed as receiver for the property and would see that the water remained on.

Other Bethany complexes were threatened with gas or electricity shut-offs due to non-payment of bills. And staff at many of the Phoenix area properties said they had not been paid for a month or more before courts began appointing receivers to assume control of the complexes.

The precise size of the Bethany rental empire is difficult to establish because the company owns apartment complexes both under its corporate name and numerous affiliated companies.

At least 18 related entities — limited liability corporations, or LLCs, registered in Delaware that own properties in Texas — filed for Chapter 11 bankruptcy this month, leaving open the possibility that they will reorganize and try to pay creditors.

But many other Bethany properties are now in the hands of court-appointed receivers, indicating that Bethany has essentially abandoned them. The receivers — appointed to represent creditors —are charged with preserving any remaining value of the assets, managing them during foreclosure and recovering whatever they can for lenders, typically by selling at a deep discount.

Bethany CEO Greg Garmon could not be reached for comment. Answering services at Bethany’s main line and Garmon’s office said voicemail boxes were full. The Bethany Group’s Web site no longer works, though the cached version of its introductory page still asserts that “It’s all about people and their homes.” The main office number at Alante at the Islands no longer works.

San Diego company handling 24 properties
San Diego based Trigild Inc. has been appointed receiver for 24 of the Bethany properties, including seven in the Phoenix area. Just 13 of the properties under Trigild’s supervision represent more than $500 million in loan defaults, according to Trigild President Bill Hoffman. Those cases are being handled by five different courts in Arizona, California, Colorado and Florida. Five other large properties in Phoenix are in receivership under 707 Management.

Hobbs, the real estate broker, said he approached Bethany several months ago to inquire whether the company was interested in selling some of its properties after hearing rumors that the company was in trouble. He said he was told that the company’s portfolio contained more than 80 properties. But he said the company denied it was experiencing any financial difficulty.

“We walked away scratching our heads, saying they either got their heads in the sand … or they don’t care about (thousands of) tenants,” he recalled. “Don’t tell me they are just going to let the ship sink.”

Hoffman, the president of Trigild Inc., which is now responsible for Alante at the Islands among other Bethany properties, said the appointment of receivers by the courts should be seen as good news by tenants.

“The tenants are going to be better off with us,” Hoffman promised. “They will see improvements very quickly. The properties will be clean, and functioning properly within a few days.”

As a practical matter, a receiver has a strong incentive to keep tenants happy. They are the source of a property’s cash flow, and occupancy rate is a key factor in determining value. And by the second week of March, some upkeep issues had been addressed at the Bethany complexes. The Alante swimming pool was cleaned and trash pickup resumed. Trigild also is paying former Bethany employees who stayed on in the complexes, according to Hoffman.

But by law, Hoffman said, the receiver is not liable for security deposits from renters who signed leases before the receivership went into effect.

“There is no obligation for the receiver or the lender to give (tenants) deposits that they don’t have,” said Hoffman. If the deposits had been handed over to Trigild it would be different, he said, “but that owner (Bethany) has obviously spent that money or done something with it.”

Chances that tenants will get back the deposit are slim, said Ed Valenzuela, executive director of the Arizona Fair Housing Center.

‘Most of the time, the tenant is out of luck’
“They could go to court and sue (Bethany) for it but if the property is in foreclosure where is the money going to come from?” he said. “Most of the time, the tenant is out of luck.”

That’s especially true in Arizona.

A recent report by the National Law Center on Homelessness and Poverty ranked the state among the worst in the nation for renters living in a property that is foreclosed upon.

For example, in Arizona and at least 30 other states, there is no legal requirement to notify tenants that the property is going through foreclosure, it said. And only New Jersey and the District of Columbia explicitly preserve tenants’ rights in the lease after a foreclosure.

The report, co-sponsored by the National Low Income Housing Coalition, warned that renters affected by foreclosure are at greater risk of homelessness, and called for federal and state governments to beef up protections. Legislation to do that has been introduced in Arizona, but it has not yet been acted upon.

Until now, the biggest problem facing renters has been summary eviction following a foreclosure. But the demise of the Bethany group raises different problems, since the new owner would have a wide range of options with a commercial property.

“The real issue is who is going to take over the property and what are they going to do with it?” said Ken Volk, who runs the Arizona Tenants Advocacy and Association in Tempe and has been advising some of the Bethany renters. “These tenants, if they leave, they could be held to the lease if the new owner wants to run it as a rental. If they don’t want to, the landlord could terminate the lease and say you have to get out, very often within five days.”

Volk has been organizing residents at the Bethany complexes to press for better treatment and has helped others legally break leases — a service for which he charges a fee.

That incenses Hoffman, who argued that such activities could amount to illegal interference.

“If he’s going to advise people to break the lease I’ll have him before the judge,” he said. “He’s certainly not going to interfere in any way with our possession and control of the asset.”

A confrontation with police
Trigild called Chandler police last week to alert them to a meeting at which Volk and about 100 Alante at the Islands residents were discussing possible next steps on property adjacent to the apartment complex. According to witnesses, eight or nine officers pushed their way into the crowd to disperse it, prompting a shouting match among tenants, police, the apartment manager and Volk before the meeting broke up.

“It was intimidating,” Volk said of the confrontation. But he said he will continue working with the tenants and dismissed Trigild’s criticism that he is intervening simply to profit off the tenants’ fears.

“I might make a little,” he said. “But the motivation is to help people. It’s what I do.”

He said the primary service he provides it to help renters understand how to legally break leases.

“By and large tenants … have no clue what to do,” he said. “They figure the morality of their situation will carry them over into the legality, and it doesn’t. There are very precise legal requirements. Unless you address them very carefully, a lawyer on the other side will get in your way.”

Nicholle Krause, the Alante resident, found that out the hard way. She threatened to withhold her March rent when her complaints about the poor condition of the property were ignored. That prompted the complex manager to threaten her with eviction, which would make it harder for her to rent elsewhere. She backed down, and paid.

She then sent the manager a letter stating that she would move out in 10 days because of the landlord had not fulfilled its obligations to keep the property in livable condition. But an attorney for the company responded that her letter did not meet legal requirements for breaking the lease.

“I want to leave … but I would need an attorney,” said Krause, explaining that even with order returning to Alante, the uncertainty of not knowing what a new owner might do with the property continues to plague her. She said she intends to move out when her lease expires in June, if not sooner. “I don’t know if the cost and the exhaustion (that it would entail) are worth it.”

As the foreclosure crisis continues to expand, many other renters around the country are likely to find themselves in the same situation as Krause.

“We have a bunch of apartment complexes around the country,” said Hoffman, the president of Trigild, Inc. “We haven’t got anywhere near the bottom. … If I look at our pipeline, it would normally be about 12 (to) 15 properties. We’re looking at a couple hundred at this stage.”

One in five U.S. homeowners are underwater

admin — Wed, 04 Mar 2009 14:36:27 +0000

One in five U.S. homeowners with mortgages owe more to their lenders than their homes are worth, and the rate will increase as housing prices drop in states that have so far avoided the worst of the crisis

NEW YORK (Reuters) – One in five U.S. homeowners with mortgages owe more to their lenders than their properties are worth, and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis, a new study shows.

About 8.31 million properties had negative equity at the end of 2008, up 9 percent from 7.63 million at the end of September, according to the study, released Wednesday by First American CoreLogic. The percentage of “underwater” borrowers rose to 20 percent from 18 percent. Another 2.16 million properties could go underwater if home prices fall another 5 percent, the study shows.

First American said the value of residential properties fell to $19.1 trillion at year-end from $21.5 trillion a year earlier, with half the decline in California. Forty-three U.S. states and Washington, D.C., were included in the study. While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.

“The economic slowdown is broadening,” said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. “As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country.”

Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62 percent of underwater borrowers and just 41 percent of mortgages.

Other areas, though, also face more stress. Connecticut, for example, saw a 25 percent increase in homes with negative equity, while Washington, D.C., had a 44 percent increase.

“Even I continue to be surprised at the tentacles of this financial and economic debacle,” said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. “More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices.”

Roughly 68 percent of U.S. adults own their own homes, and about two-thirds of these have mortgages. Many economists expect the nation’s unemployment rate to rise above 9 percent before the recession ends, up from January’s 7.6 percent.

CALIFORNIA, NEVADA UNDER STRESS

California had 1.9 million borrowers with negative equity at year-end, more than any other state, followed by Florida’s 1.28 million. About three in 10 borrowers in both states were underwater.

By other measures, Nevada was the most stressed, with 55 percent of owners having negative equity and borrowers on average owing 97 percent of what their homes are worth. About 28 percent owe more than 125 percent of their homes’ value.

Michigan had 40 percent of its homeowners underwater, while Arizona had 32 percent.

New York fared best, with just 4.7 percent of borrowers with negative equity and an average 48 percent loan-to-value ratio, though this could change as employment and bonuses slide in the financial services industry.

According to the S&P/Case-Shiller Home Price Indices, prices of U.S. single-family homes slumped 18.5 percent in December from a year earlier, the biggest drop in the 21-year history of the data.

Many lenders are taking steps to keep borrowers out of foreclosure. The Obama administration has backed legislation that could broaden powers of bankruptcy judges to modify mortgages for troubled borrowers. Among major lenders, only Citigroup Inc has supported such a plan.

MacIntosh expects housing prices to keep falling until “well into” 2010. “There is no magic bullet or magic arrow here,” he said. “It is a question of trying to come up with ideas and seeing what happens. It could take a long time.”

First American CoreLogic is an affiliate of title insurance and real estate services company First American Corp.

Florida courts blast through forclosure cases: 20 seconds per case

admin — Wed, 18 Feb 2009 17:45:57 +0000

2 Questions, 15 Seconds, 45 Days to Get Out; ‘What’s to Talk About?’ Says a Judge

FORT MYERS, Fla. — Hoping to save her house, Saundra Hill Scott arrived at the county courthouse clutching dog-eared mortgage bills and letters from her lender.

She need not have bothered. The foreclosure hearing lasted less than 20 seconds, with Judge John Carlin asking her two questions: Are you current on your mortgage and are you living in the home? She answered no and yes and then offered to show him her paperwork. “I don’t need to see that. That’s between you and the bank,” he said as he gave Ms. Hill Scott, her husband and three grandchildren 60 days to work out a deal with their lender or vacate their three-bedroom house.

While the Obama administration prepares to unveil on Wednesday its plan to rescue the U.S. housing market, officials here in Lee County have come up with their own unique plan for dealing with the crisis. To clear a huge backlog of foreclosures, judges are hearing “rocket dockets” of nearly 1,000 cases a day and calling retired colleagues back to the bench to help ease the workload.

The housing crisis has been pounding the Florida court system like a Category 5 hurricane. Not only does the state have among the highest default rates in the country, its legal system, unlike many other states with devastated housing markets, requires judges to sign off on foreclosures. The combination has created a monster glut of cases that are overwhelming the courts. The Obama plan to encourage more loan modifications nationally may stem the flood of foreclosures in Florida somewhat, but Lee County officials say that the area’s large number of unemployed residents and housing speculators may end up losing their properties anyway.

Hard-Hit County

Charlie Green, Lee County’s clerk of the circuit courts, says the county is still on pace in February to exceed new filings in January and there’s a hearing on Thursday with 800 foreclosure cases. “All these plans that the government has come up with are great,” says Mr. Green. “But it doesn’t help us get these cases off our books.”

Charlie Green

No area has been hit harder than Lee County, a largely working-class and second-home enclave, where Ponce de León is believed to have wandered in search of gold and conquest in the 16th century.

Modern-day treasure seekers invaded this area during the recent housing boom, snapping up houses and parcels of land, hoping to flip them to retirees and working families. Millionaire University, an unaccredited program in nearby Cape Coral, taught speculators from around the country how to buy and sell properties for huge profits. From 2000 to 2005, house prices in Cape Coral more than doubled.

Two years ago, the Lee County court system had about 1,900 foreclosure cases on the books. That number swelled to 24,000 by the beginning of this year. “We have to move these cases out of here,” says Mr. Green. “That’s how we get these houses back on the market and get to the bottom faster.”

Many defendants in Fort Myers are speculators who never lived in the houses and don’t bother to show up for the hearings or respond to court summonses. But some of the homeowners who do come to court are annoyed that they’re given only a few seconds to speak to the judge.

“The judge didn’t want to hear from me,” said a frustrated Reed Morgan, a self-employed business consultant, wearing loafers and a blue oxford shirt, after Judge Carlin gave him 60 days to work out a modification plan with his lender or vacate his three-bedroom house.

Minutes after the bailiff opened the courtroom doors at a recent hearing, every seat was filled with delinquent homeowners: a mechanic with two pierced ears and a goatee, a young woman in a car-rental uniform, a gray-haired landlord who rehearsed his lines with the woman next to him.

Saundra Hill Scott, left, with her 4-year-old grandson, has less than two months to move out of her house after a lender moved to foreclose on her Lehigh Acres, Fla., home.

“It’s like the Exodus,” said Ms. Hill Scott, a middle-school teacher who went into default after her monthly payments on her adjustable-rate mortgage reset. She now owes $3,300 a month, up from the $1,600 she was paying a year ago. She says she hasn’t made a mortgage payment since January 2008 and is in negotiations with her lender seeking a modification.

During a break in the hearing, lawyers used dollies to wheel in boxes containing hundreds of case files, which they piled onto tables and on the floor.

One lawyer, wearing a dark suit and untucked white shirt ran between the judge’s bench and the dozens of open boxes on the floor. His colleagues sat cross-legged on the courtroom floor, sorting through files.

The judge signed dozens of them without discussion and passed them to a row of court employees to process the paperwork.

“Case No. 136,” the clerk intoned. “Wells Fargo versus Edward Callahan.”

Judge Carlin asked whether the man was living in the house and was current on his mortgage. He answered no to both questions.

“Your house will be sold in 45 days,” said the judge. “That’s all for today.”

Case time: 15 seconds.

Judges’ Sympathy

The judges say they sympathize with the homeowners’ hardships, but often the cases can be decided after a brief hearing because there are no legal issues in dispute which would warrant a lengthy trial. Some homeowners don’t understand they are required to file paperwork before the hearing to challenge the lender’s case. Many of them never file the documents or hire lawyers, the judges say.

Many judges, including Judge Carlin, are giving homeowners much more time to stay in their houses than the law requires.

“That’s pretty humane considering that many homeowners have been living rent-free for more than a year,” says Robert Hill Jr., a Fort Myers lawyer who represents lenders.

Lee County judges say they are trying to screen for cases that would benefit from mediation, but Chief Judge G. Keith Cary opposes making such a requirement. “A guy hasn’t paid his mortgage in over a year,” says Judge Cary. “What’s there to talk about?”

Homes around Lee County have suffered one of the steepest price drops in the country, down almost 50% from the peak. Empty houses and shuttered storefronts line city streets.

In nearby Bonita Springs, Mr. Morgan says his neighbor vanished from his house in the middle of the night. “He loaded up a U-haul and was gone,” Mr. Morgan says. “I have known him for six years and he never said goodbye.”

The court itself hasn’t been immune to the pain. The county clerk’s budget is shrinking even as overtime has added about $60,000 in costs since October.

To save money, Mr. Green, the Lee County clerk, has removed light bulbs from around the court building, put printers on draft mode to save ink and forbidden employees from making long-distance phone calls, even business calls.

The lawyers are doing well, though. They can earn as much as $100 per foreclosure to present cases to the judge that have been prepared by big law firms in Miami and Tampa, which are hired by out-of-state lenders.

But speed is of the essence. Lee County lawyers speak in hushed tones of one firm that made the mistake of not being organized enough at a rocket-docket hearing. The judge postponed their foreclosure actions for an additional 60 days. “Lenders don’t like delays,” says Mr. Hill, who averages 1,900 foreclosure cases a month.

Economists say Florida’s housing recovery will likely be stalled until the properties stuck in legal limbo are cleared. In California, where judges are typically not involved in the foreclosure process, some housing markets are showing some signs of stabilizing.

Mr. Green says his courts are making progress. They cleared more cases out of the backlog last month than they received in new foreclosures. In light of President Obama’s plans, it’s possible that lenders could cancel the foreclosure even though the judge has signed off. “The problem is that the lenders have spent all this money on attorneys and filing fees,” says Judge Cary. “You are so far into it, would you really stop it at that point? It’s an expensive proposition.”

The last homeowner to show up in Judge Carlin’s courtroom spoke through a Spanish interpreter. She said she wasn’t current on her mortgage, but was living in the house. The judge gave her 60 days to vacate. She didn’t say anything and returned to her seat “That’s all for today. Thank you for coming in,” the judge said.

The woman sat in the empty courtroom, covered her eyes and cried. Judge Carlin called a brief recess and returned to his chambers. Lawyers stacked more foreclosure cases on his bench for him to sign when he returned.

Foreclosure fix: Obama’s options

admin — Mon, 09 Feb 2009 05:10:12 +0000

Administration officials are racing to find a way to use bailout funds to help homeowners. Stopping the foreclosure plague won’t be easy.

NEW YORK (CNNMoney.com) — This much we know — the Obama administration wants to set aside between $50 billion and $100 billion to address the foreclosure crisis.

But how exactly officials plan to address this bear of a problem remains to be seen.

Treasury Secretary Timothy Geithner is expected to lay out plans for the $350 billion remaining in the financial industry bailout package on Tuesday.

Geithner was originally scheduled to unveil the program Monday, but the Treasury Department announced Sunday that it was pushing back the plan by a day to allow Geithner and others in the Obama administration to focus on getting the stimulus bill passed in Congress.

It is unclear if Geithner will unveil a specific plan for tackling foreclosures Tuesday. But the administration has said for weeks that it will devote more resources to helping homeowners than its predecessor.

“We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners,” wrote Larry Summers, director of Obama’s National Economic Council, to congressional leaders last month.

Finding a foreclosure fix is daunting, experts said. It eluded the Bush administration, which preferred to try to entice mortgage services to voluntarily modify loans without committing government funds.

Obama faces similar hurdles.

“It’s been a real challenge,” said Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable. “To come up with a widespread approach is very difficult.”
Potential plans

Obama’s plan may expand on the Federal Deposit Insurance Corp.’s streamlined loan modification program, which serves as a model for workouts being conducted by several banks and by Fannie Mae and Freddie Mac.

The FDIC’s program, which is underway at failed lender IndyMac, calls for making monthly payments more affordable by reducing interest rates, lengthening loan terms or deferring principal. Servicers aim to reduce payments to no more than 31% of a borrower’s monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers.

Summers has said that banks that receive bailout funds will be required to implement foreclosure prevention programs.

The Obama administration is expected to put some money behind the modification efforts. It’s likely any modification plan will come with incentives for servicers and with some type of backstop in case the borrower defaults again. FDIC Chairman Sheila Bair unveiled a $24.4 billion plan in November that offered servicers $1,000 and provided a guarantee to cover 50% of any losses in case of redefault. The proposal, which she estimates will help 1.5 million people avoid foreclosure, has gone nowhere so far.

Congressional lawmakers would require the president to develop a loan modification plan under the stimulus bill currently under debate in the Senate.

“Stemming the tide of foreclosures, which are at the heart of this economic crisis, must be one of our top priorities,” said Senator Chris Dodd, D-CT, in a statement late Friday night after the Senate approved his amendment to the stimulus plan that would require the Treasury Department to spend at least $50 billion in funds from the bank bailout on a loan modification program.

“By providing the Treasury with the authority and funds to design and implement a loan modification program, we can help nearly 2 million families nationwide…avoid losing their home,” Dodd added.

A major problem confronting the Obama administration, however, is what to do with the rising number of foreclosures stemming from unemployment. Loan modifications don’t work for these borrowers.

The only viable solution for these delinquent homeowners is to get the economy moving again so they can get jobs, experts said.

Along those lines, Shaun Donovan, the Secretary of the Department of Housing and Urban Development, said in an interview on CNN Saturday morning that creating jobs was the top way to address the foreclosure problem.

“What is really driving the foreclosure crisis right now is that people are losing their jobs. And so job number one is to pass a recovery bill that will add three to four million jobs in this country,” Donovan said.
Beyond bailout

To be sure, the administration’s efforts will go beyond the bailout package. Already, it’s likely the massive stimulus package will contain measures to spur homebuying, including a $15,000 tax credit for those purchasing a home. On deck is controversial legislation to allow bankruptcy judges to modify loans on primary residences.

Congressional Democrats are also looking to revamp the troubled Hope for Homeowners program, which was designed to refinance struggling borrowers into government-backed Federal Housing Administration loans. Few borrowers have signed up for the program, in part because of its high fees. Lawmakers hope to make it more attractive by easing the terms and providing incentives for servicers to participate.

In his statement late Friday, Dodd said his amendment would reform the program by reducing the upfront and annual premiums for borrowers, lowering the percentage of future equity that homeowners must share with the government and adding incentive payments to servicers.

Whatever the administration chooses to do, it should implement it quickly, experts said. Foreclosures continue to rise, with a new one started every 13 seconds, according to the Center for Responsible Lending.

“Every minute they delay someone is going to lose their home,” said Kathleen Day, the center’s spokeswoman. “The government was waited too long to act.”