Subprime: Bailouts won't cut it

NEW YORK (Money) -- Non-profits and lawmakers are stepping up efforts to help people at risk of losing their homes. But critics contend the programs will do little to stem the nation's rising tide of foreclosures.

On Wednesday, the Neighborhood Assistance Corporation of America (NACA), a nonprofit devoted to helping people who have been the victim of predatory lending, announced a $1 billion program that will refinance strapped borrowers out of adjustable mortgages with soaring rates into low fixed-rate 30-year loans.

In New York, Sen. Charles Schumer is pushing that state to create a foreclosure task force that would provide financial counseling and education to homeowners who run into difficulty paying their mortgage. Nationally, Schumer thinks the government should spend hundreds of millions of dollars to bail borrowers out of loans they are having difficultly paying.

"We are sending a message to the victims of predatory mortgages that there is hope," said Bruce Marks, who heads NACA.

Critics of the programs, though, contend they are a waste of public funds. Last year, a study by professors at Cleveland State University found that 60 percent of the delinquent borrowers who participated in a local government-sponsored counseling program ended up defaulting.

What's more, many troubled borrowers who are offered new loans in an effort to help them keep their homes end up defaulting anyway. Drexel University finance professor Joseph Mason and Josh Rosner of New York investment firm Graham Fisher, found that the "re-default" rate was 25 percent among people in one government-sponsored program that lowered interest rates on problem loans.

"By putting people in new loans all we are doing is throwing leverage after leverage," says Joseph Mason, a finance professor at Drexel University and an expert in the mortgage market. "These programs are not a good idea. They just don't work."

Marks says NACA's program is better because it mixes counseling and advocacy with real money to assist troubled borrowers. Citigroup and Bank of America have pledged the combined $1 billion to fund the program, which NACA hopes will help as many as 10,000 homeowners at risk of default.

Borrowers who enter the NACA program will be able to refinance out of their loan into a 30-year fixed mortgage at a rate that is 1 percentage point below what would be available through a for-profit bank.

Currently NACA is offering loans with a 5.62 percent interest rate. Marks says the people NACA is helping are not bad borrowers, just people who were trapped by poor loans. "The loans they were offered were structured to fail. NACA is replacing those with sustainable affordable mortgages," he said.

Ohio, too, which has one of the highest rates of foreclosure in the country, is raising money to help homeowners who cannot afford their mortgage. Last month, the state announced a program to sell $100 million in bonds to fund a program that would help 1,000 families deal with mortgage problems. Nearly 30 states in all have announced legislation that would address foreclosure issues this year.

The new programs are a response to the nation's rapidly growing mortgage problems. The delinquency rate among borrowers with poor credit has risen to 13.3 percent, according to First American LoanPerformance. That's the highest level since the company started tracking delinquencies in that group a decade ago.

For all borrowers, delinquency rates have risen nearly 50 percent in the past two years to a recent 2.87 percent, according to Equifax Inc. and Moody's Economy.com. Historically, more than half of all borrowers who become delinquent on their mortgage eventually enter foreclosure with their bank.

"There are hundreds of billions of dollars worth of problem loans out there," says Zach Schiller, research director at Policy Matters Ohio. "We have much larger problems than can be dealt with by these programs."

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