Local real estate experts hope President Obama's $75 billion housing plan will buy time to allow lenders and homeowners to work together to prevent foreclosures, but those same experts question the long-term effectiveness of the proposal.
"In the short term, it will help people who are behind on their mortgages," said Tina Christein, Chattanooga-based president of the Tennessee Mortgage Brokers Association.
President Barack Obama on Wednesday unveiled the plan to keep between 7 million and 9 million homes out of foreclosure. One part of the plan, the Homeowner Stability Initiative, would provide incentives to mortgage lenders to convince them to help up to 4 million borrowers facing foreclosure. The initiative would result in homeowners' mortgage payments being cut to 31 percent of their gross monthly income.
At least half of Chattanooga homeowners with a mortgage are above that ratio, Ms. Christein said. Lending standards in the past capped mortgage debt at 29 percent of a borrower's monthly income and all debt at 41 percent, she said. But some subprime and FHA loans in recent years have allowed a person's total debt to reach 50 percent or more, she said.
Frank Schriner, city president for First Tennessee Bank in Chattanooga, said the housing slump provoked the current recession "and that's what has to be solved first" before a recovery may begin.
"We've got to stabilize the housing market and I hope this proposal will help do some of that," he said. "Everyone loses when there are widespread foreclosures."
High debt levels are one reason the president's plan is a temporary fix, one Realtor said.
"It's a Band-Aid," said Brandi Pearl Thompson, a real estate agent with ReMax Properties North in Hixson. "Eventually Band-Aids fall off. The next step would be to help them sell their home. If they're behind, they obviously can't afford the house."
Any homeowner who receives a modified mortgage would still be at risk of foreclosure if he loses his job or experiences any other crisis, Ms. Thompson said.
"They're throwing money at a problem, and money is not the end all, be all," she said. "People have to take fiscal responsibility for what they did."
But President Obama's plan would help homeowners who are not yet delinquent on their loans, administration officials told the Associated Press.
The White House intends to help up to 5 million homeowners refinance mortgages that, while not delinquent, are written for more than the homes are now worth. Such loans are called "under water" mortgages, and have resulted from falling home prices.
Last week Fannie Mae announced it was halting all foreclosures on mortgages it backs until March 6, in anticipation of the president's initiative, said Cindy Walker, director of Crye-Leike Realtors' foreclosure sales division.
While the moratorium and the president's plan will help in the short term, officials will be challenged to separate who genuinely needs help from who is beyond help, said Boyd Steele, executive vice president of commercial lending at Northwest Georgia Bank.
Mr. Steele said he disagreed with the president's decision to allow bankruptcy judges to reduce mortgages.
"In today's world (bankruptcy) becomes a strategy for some borrowers to lower their amount of debt," Mr. Steele said. "It used to be that bankruptcy was a stigma that people did whatever they could to avoid."
Giving judges the ability to modify mortgages likely will push up mortgage rates since lenders will price in those rates the increased risk of losing some of their payments from bankruptcy court action, Mr. Schriner said.
And, judges could be hard-pressed to determine what a home's fair market value is, Ms. Walker said.
But bankruptcy attorney Eron Epstein said giving judges the authority to modify mortgages also would help more individuals stay in their homes, which could limit some foreclosures.
"Most of the people who file (for bankruptcy) today are 'under water' with their mortgages (owing more than their house is worth) so this could be a significant help for a lot of people," he said.
Mortgage lenders could be forced to absorb more loan losses in such a bankruptcy, but those losses may not be any greater than the expense of foreclosing on a property and then having to try to resell the vacant property at a reduced value, Mr. Epstein said.