A year ago, officials focused on stemming the foreclosure tide. Now they are touting the need for foreclosures to rebuild the housing market.

Last week Phyllis Caldwell, head of the Treasury Department’s Homeownership Preservation Office, told a congressional panel that “an important part of ensuring longer-term stability in the market is to enable properties to be resold to families who can afford to purchase them.”

And White House Press Secretary Robert Gibbs last month told reporters that without sales of homes in distressed areas the “recovery in the housing market stops. It’s frozen.”

“That obviously can have — we believe and others believe — a very negative and detrimental impact to our economic recovery efforts and the housing markets in states that have been hardest hit,” Gibbs said.

But when Obama unveiled his signature foreclosure prevention program in February 2009, he said loan modifications were a key way to prevent the housing crisis from deepening. His initiative called for reducing distressed borrowers’ monthly payments to 31% of their pre-tax income.

“We’re not just helping homeowners at risk of falling over the edge; we’re preventing their neighbors from being pulled over that edge too — as defaults and foreclosures contribute to sinking home values, and failing local businesses, and lost jobs,” the president said.

The shift in rhetoric signals the Obama administration is recognizing that its loan modification program is foundering, experts said. Also, it is acknowledging that banks must address their swelling ranks of delinquent loans.

To be sure, the administration is still concerned with helping homeowners avoid foreclosure. Officials have rolled out a series of initiatives in 2010 aimed at assisting the unemployed and the underwater who owe more than their houses are worth.

And, they have called for reviews into the institutions’ foreclosure policies and procedures, stressing that servicers must comply with the law.

But they also now acknowledge more vocally that foreclosures must continue for a normal housing market to return. And that, in part, is why the administration is not supporting a nationwide foreclosure freeze despite the paperwork scandal that is roiling the mortgage industry.

The administration says there has been no change in either policy or rhetoric surrounding foreclosures and the housing market. The loan modification program was never meant to save every homeowner and officials always acknowledged the role of foreclosures in the market’s recovery, according to a Treasury spokeswoman.

“We have always thought some foreclosures needed to happen for there to be a full housing recovery,” said the spokeswoman, Andrea Risotto.

But, experts say, the new tone eminating from the White House also recognizes that the modification program is not living up to its initial goals of helping up to 4 million people avoid foreclosure. Some 496,000 distressed borrowers have received long-term modifications through September.

“What they have now realized is there are a lot of borrowers who can’t be saved and have to be moved through the foreclosure process,” said Laurie Goodman, senior managing director with Amherst Securities.

And they must break this news to Americans.

Officials are “trying to soften everybody up” to the fact that foreclosures are necessary, said Guy Cecela, publisher of Inside Mortgage Finance, an industry newsletter.

The new talking points, however, won’t likely result in a change in policy, said Anthony Sanders, a real estate finance professor at George Mason University. Administration officials will continue to support foreclosure alternatives because they are more palatable.

“As long as politics are involved, they’ll keep doing it,” said Sanders. 

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Written: Bryan Tilford & Matt Bieler

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