The Relief For House Owners From The Foreclosure Bailout Package

October 9th, 2008

The prime target of the $700 bailout package is focused on Wall Street together with mumblings about giving relief to harassed house owners.

The obvious question is how will it help the foreclosure victims? The money will be used to purchase soured mortgages as well as securities linked to these mortgages. As soon as the government is empowered it is expected to put the plan into force and give “maximum assistance to homeowners.” Federal officials have been already trying to persuade lenders to opt for loan modifications. Most lenders are amenable to small changes. They are shy to proceed if the income of the borrower indicates incapability to continue with even the modest changes or if the losses are already too great.

Thus what is new about the recent foreclosure package for house owners facing foreclosures? In this instance the government will become directly an investor in mortgage supported securities. It will then have the power to enforce servicers to negotiate workouts. It should have a bold impact on the foreclosure scenario. Steven Adamske of House Financial Services Committee said, “The government is here to help. We want to rebuild neighbourhoods from the ground up.” But Paul Leonard of Center for Responsible Lending differs. He thinks that the only way foreclosure eviction can be avoided is to permit bankruptcy judges to decide on loan modification or loan waiver. This alone could prevent about 600,000 foreclosures. Mortgage lenders from the beginning have been against such a move because this will discourage the banks from sanctioning loans.

Currently about 2 million mortgages are over 60 days due and at risk from foreclosures. Since 2007 there have been over 900,000 foreclosure actions.

Prevention of foreclosure depends on two operations. A new federal operation, Hope for Homeowners is scheduled to start in October. It will be focusing on those who are not able to make mortgage payments. The programme is for those who bought their houses before 2008 and now have to make a monthly mortgage payment that is over 31% of their income. Under this programme the banks will bring down the value of the mortgage to 90% of the current value of the house. The programme is vital especially for California where most of the loan value is more than the worth of the mortgaged property. Secondly this new long term (30 years) mortgage would be insured by FHA – the amount not exceeding $550,440.