海角大神

Nick Terlouw sprays green paint from a garden hose as if he were watering the lawn. The browned-out grass, dead from neglect, turns golf-course luscious in less than 15 minutes. Then it鈥檚 off to the next lawn for Mr. Terlouw, one of the few people in Stockton 鈥� America鈥檚 foreclosure capital 鈥� making serious green out of the bust.

Sometime soon, Terlouw may be visiting the homes of Kevin Smith and Eddie Chavez. These Stocktonians might be in the throes of foreclosure before the next president is sworn in.

Both candidates have ambitious plans for helping struggling homeowners like Mr. Smith and Mr. Chavez. But the candidates differ over how to get lenders to modify loans and over who should ultimately foot the bill for the losses.

Republican Sen. John McCain favors a more aggressive approach of buying up bad loans and reissuing new ones mostly at taxpayer expense.

His Democratic rival, Sen. Barack Obama, would try carrots and sticks to move lenders to renegotiate and swallow much of the losses. Many housing experts find fault with both plans, leaning toward a partial mix of the two.

鈥淚t鈥檚 not that it鈥檚 a bad idea for the federalgovernment to buy some of this debt, it鈥檚 just what the price is and what the terms of the deal are,鈥� says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles. 鈥淚t would be prudent for the taxpayer to divide the hurt, so to speak, with the lender and the homeowner.鈥�

The US mortgage crisis appears only to be deepening. Third-quarter foreclosure filings are up 71 percent over the same period last year, according to new figures released Thursday from RealtyTrac.

More foreclosures could be triggered by job losses, economic downturn, and borrowers unwilling to keep paying mortgages that now exceed the value of their homes.

Smith, a car salesman, faces many of these pressures and is reconsidering his expenses. Between his home and a second rental property, he鈥檚 $400,000 under water. He recently lost his renter, to boot.

鈥淚f the principal balance isn鈥檛 reduced for everyone, then this situation is going to keep going on,鈥� says Smith. He figures within three months he will stop making payments on both mortgages. 鈥淪everal friends in the neighborhood, they are talking about the same thing.鈥�

McCain鈥檚 plan would purchase, shrink, then reissue mortgages for many people 鈥� but probably not Smith. For starters, his loans aren鈥檛 subprime.

Regardless, McCain鈥檚 plan wouldn鈥檛 help on the second home because, according to his campaign website, 鈥渘o taxpayer money should bail out real estate speculators.鈥�

As for the roof over Smith鈥檚 head, it鈥檚 now worth roughly $475,000. That鈥檚 low compared with his $690,000 mortgage, but perhaps too high for a replacement loan insured by the Federal Housing Administration (FHA).

Smith might get more time to cut a deal with his lenders if Obama becomes president. His plan calls for a 90-day moratorium on foreclosures by those financial institutions getting federal bailouts. The idea is to give time for new loan modification programs to get up and running.

鈥淚 think it would be delaying the inevitable [unless] there would be help with the balance,鈥� says Smith, who says his lender, GMAC Mortgage, 鈥渉asn鈥檛 been too flexible.鈥�

He鈥檚 also considering bankruptcy. Under current law, a bankruptcy judge could rewrite the loan on his rental property but not his main home. Obama would change the law to give judges the ability to rewrite loans on primary homes, too 鈥� an idea McCain does not support.

That could help both Smith and Mr. Chavez, an insurance salesman in Stockton. Chavez will probably stop paying his mortgage next month, when his adjustable rate is set to jump from 8.75 percent to 12 percent 鈥� more than he can handle.

Just the threat of letting judges modify loans might motivate lenders to cut deals with folks like Chavez. But the idea has its downsides.鈥淥ur lenders are telling us that as soon as that proposal goes into law, interest rates would go up between 1.5 and 2 percentage points instantly,鈥� says John Mechem, spokesman for the Mortgage Bankers Association (MBA).

鈥淪omeone has to pay for the [added] risk.鈥�

It鈥檚 unclear if Chavez would qualify under McCain鈥檚 plan, which wouldn鈥檛 help borrowers who fudged their loan applications. Chavez admits his documents contain incorrect numbers regarding his ability to pay, but he says his broker inflated them without his knowledge.

Selling the car to pay the mortgage

For the time being, he has posted his Pontiac Grand Am for sale on Craigslist. The proceeds would buy him one more month. 鈥淚f I can get through one month, maybe something will change then. You never know,鈥� says the father of a 2-year-old. 鈥淚t鈥檚 hard to sleep.鈥�

Some housing experts sound just as uneasy. They worry that for all the talk about mortgage buyouts or modifications, no one knows how to do that yet.

Wall Street spliced and diced many of these bad loans and sold the pieces. Any given mortgage might have dozens of investors, any one of whom could sue the loan servicer for decisions they don鈥檛 like.

Loan modification programs so far have failed because they don鈥檛 address this paralysis of the loan servicers, says Susan Wachter, professor of financial management at the University of Pennsylvania鈥檚 Wharton School.

鈥淕etting this regulatory framework right to make this happen is absolutely the issue,鈥� she says.

Indeed, the latest loan modification effort, called Hope for Homeowners, has received only 79 applications since it started Oct. 1, according to the FHA. Under the plan, if lenders agree to take a big 鈥渉aircut鈥� and drop the principal down to 90 percent of the home鈥檚 current value, the FHA will back the loan.

鈥淚t鈥檚 still new, we are just starting the training,鈥� says Bill Glavin, special assistant to the Federal Housing Commissioner. As such, he says, it鈥檚 too early to gauge industry interest 鈥� a sentiment echoed by the MBA, which says the industry likes the new plan and has already done 2.3 million mortgage workouts since mid-2007.

Yet Mr. Glavin agrees that complexity within the system isn鈥檛 helping. 鈥淭here are situations where the servicers鈥� hands are tied because of the investors,鈥� he says. 鈥淥bviously, the less people behind the loan the easier.鈥�

One of the half-dozen options on the table for breaking the logjam, says Dr. Wachter, is McCain鈥檚 offer to buy mortgages at their full price. That would presumably please most investors and embolden servicers to sell.

McCain鈥檚 campaign puts the cost at $300 billion, some of which would come from the Wall Street bailout and Hope for Homeowners funds.

鈥淚s it expensive? Yes,鈥� McCain said during the final presidential debate Oct. 15. 鈥淏ut we all know, my friends, until we stabilize home values in America, we鈥檙e never going to start turning around and creating jobs and fixing our economy.鈥�

Housing experts condemn paying full price, for reasons pointed out by Obama鈥檚 top economic adviser.

鈥淛ohn McCain wants to spend a big chunk of the rescue money, that ought to [go] to homeowners, paying off the most irresponsible lenders,鈥� says Austan Goolsbee, a University of Chicago economist advising Obama. 鈥淭hat guarantees a loss to the US taxpayer.鈥�

But how else to get servicers to agree to losses? Obama has embraced two alternatives: Show them the carrot of a 鈥渟afe harbor鈥� from investor lawsuits and the stick of bankruptcy judges who can write down loans.

Other ideas from experts (not the candidates) include using eminent domain to buy mortgages at a discount and removing tax preferences for mortgage trusts. On Friday, the director of the Federal Deposit Insurance Corp. suggested another option: a partial federal guarantee in case homeowners default again on a loan workout.

鈥淣o one of these [ideas] is getting traction, and we need traction soon,鈥� says Wachter. 鈥淭here are lawsuits going on, and [there is] a lack of understanding that if we don鈥檛 address this problem quickly, it will worsen by several degrees of magnitude.鈥�

Not everyone agrees that more aggressive tactics are necessary.

鈥淓very lender out there is already financially motivated to undertake such modification,鈥� says Mr. Gabriel at UCLA. 鈥淢y sense is the private sector is going to get better and better at this over the course of the next six months.鈥�

During this learning curve, he says, a foreclosure moratorium might be sensible.

In his real estate office in Stockton, Cesar Dias rebuffs talk of a 鈥渕oratorium.鈥�

He鈥檚 busy selling homes again, thanks to deep discounts on some of the roughly 9,000 foreclosures this year in San Joaquin County. He started a weekly 鈥渞epo home tour鈥� that buses buyers around to foreclosures 鈥� an idea that鈥檚 helped remove the stigma around such properties. Now some homes are getting multiple offers.

鈥淎 moratorium delays the process,鈥� says Mr. Dias, who argues that the policy focus ought to be loan modifications. There are 鈥渟ome people who are not going to be able to be saved,鈥� he adds, and in those cases a moratorium just holds up the reviving market.

So if buyers are reemerging, what if politicians did nothing?

One danger: Investors might feed on places like Stockton, turning former owner-occupied neighborhoods into high-rent zones.

鈥淗eck, if this continues we鈥檒l have a lot of cheap houses, sure you will. But you will also have a building industry that鈥檚 on its knees. You will have millions more homeowners who will be displaced,鈥� says John Taylor, president of the National Community Reinvestment Coalition.
Those who benefit, he says, would be 鈥渂ottom feeders鈥� like hedge funds.

Vandalism a problem

The worry about rental conversion seems distant still to Jon Moore, chief deputy director of the county鈥檚 community development department. For now, the priority is getting people 鈥� owners or renters 鈥� back into vacant homes that now are targets for metal thieves and vandals. The problem is so bad that local governments here are pushing banks to hire Terlouw鈥檚 Greener Grass Co. to spray the browned-out lawns that are a dead giveaway of vacancy.

The county also anticipates receiving $9 million in new federal money to buy some of these vacant homes to fix up and then rent or sell. That鈥檚 maybe enough for 100 to 120 houses, says Mr. Moore. 鈥淚t鈥檚 a drop in the bucket.鈥�

A local nonprofit called S.T.A.N.D. does some of that rehab work already. The cheap prices ought to delight S.T.A.N.D., but staffers say it鈥檚 hard to commit funds when prices could drop further and when their low-income buyers are anticipating even better prices if they wait.
That wait-and-see attitude goes all the way to Wall Street.

鈥淭he problem now is that there seems to be a policy proposal du jour,鈥� says Kerry Vandell, director of the Center for Real Estate at University of California, Irvine.

鈥淚t results in irrational behavior on the part of the homeowners and lenders to game this thing 鈥� to wait it out [because] there may be a better deal down the road,鈥� he says.

That鈥檚 an argument for picking a course and going with it.

Kevin Smith, the car dealer whose day of default may be fast approaching, echoes the sentiment: 鈥淚f they are going to implement something, do it quickly. Don鈥檛 wait.鈥�

Lessons from the Great Depression and FDR鈥檚 plan

A real estate run-up. Interest-only and balloon loans. Borrowers convinced home prices wouldn鈥檛 fall 鈥� until they suddenly did.The housing boom of the 1920s and Great Depression bust that followed sound startlingly contemporary. And the fixes implemented under the New Deal government of President Franklin Roosevelt ought to be considered today, argue analysts from normally opposing Washington think tanks.

The centerpiece of Roosevelt鈥檚 response was the Home Owners鈥� Loan Corporation (HOLC). Formed in 1933, the HOLC took over troubled mortgages from lenders and refinanced them on terms more manageable for home owners. In exchange, HOLC gave lenders bonds that paid lower 鈥� but guaranteed 鈥� interest rates.

The model offers some confirmation for today鈥檚 movement toward buying up bad loans.

鈥淚 think there are tremendous lessons from HOLC,鈥� says Alex Pollock, resident fellow at the conservative American Enterprise Institute.

鈥淵ou need to have a refinancing program for troubled mortgages in which the troubled borrower gets a new loan that he鈥檚 more likely to pay, and the old lender gets paid off 鈥� but experiences a loss as part of the process,鈥� he says.

While Sen. John McCain鈥檚 campaign has suggested buying loans at full price, HOLC managed to buy at a discount. HOLC also succeeded in remaining temporary 鈥� a show of government restraint that Mr. Pollock lauds. When it closed up shop in 1951, HOLC turned over a modest surplus.

Some borrowers who could have stayed in unfavorable mortgages defaulted to get into more favorable HOLC loans, notes Pollock. Some experts today worry about bailing out those angling for a lower principal.

Today鈥檚 housing crisis isn鈥檛 nearly as bad. Another crucial difference: Loans can鈥檛 be taken over as easily because many have been divided into securities held by investors around the world.

鈥淭he securitization makes all this far more complicated, but the underlying principle that the government is giving a guaranteed stream of income 鈥� albeit at less than par 鈥� is still a common denominator,鈥� says Andrew Jakabovics, associate director of the economic mobility program at the liberal Center for American Progress Action Fund.

His think tank has put forth a plan to create a modern-day HOLC. The plan includes a way to get around the difficulty in acquiring securatized loans. By modifying a statute known as the Real Estate Mortgage Investment Conduit, or REMIC, the government could wield the stick of tax-status changes against trustees of such loans.