Mortgage Refinance and Foreclosures

March 31, 2010

By Padmini Arhant

In the current economy, two major issues deserve urgent attention.

They are – unemployment and home ownership.

This topic will focus on the homeowners and the federal program under consideration to address the foreclosures arising from high mortgages.

Meanwhile, the following news report and editorial from other news organizations are presented for reference.

According to the –

1. New York Times report By David Streitfeld – Friday, March 26, 2010 – Thank you.

New help for homeowners – Revising Loan Modification

The Obama administration will announce today a broad new initiative to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments.

The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which has put millions of Americans at risk of losing their homes.

A major element of the new program, according to several sources who spoke on the condition of anonymity, will be to encourage lenders to write down the value of loans for borrowers in modification programs. Until now, modification programs have focused on lowering interest rates.

Another major element will involve the government, through the Federal Housing Administration, refinancing loans from borrowers whose home value has sunk below what they owe on it.

More than 11 million homeowners are in this position, known as being underwater.

That aspect of the plan would apply even to borrowers who have not fallen behind in their mortgage payments.

Investors who own the loans would have to swallow losses but would probably be assured of getting more in the long run than if the borrowers went into foreclosure.

The FHA would insure the new loans against the risk of default.

Many details of the administration’s plan remained unclear Thursday night, including the precise scope of the new programs and the number of homeowners likely to qualify.

This much was clear, however:

The plan could put taxpayers at increased risk.

If many additional borrowers move into FHA loans, a new downturn in the housing market could send that government agency into the red.

The FHA has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened, insuring more than 6 million borrowers.

Sources said the agency would receive $14 billion in funds from the Troubled Asset Relief Program, cash it could dangle in front of financial institutions as incentives to participate in the new program.

A third element of the White House’s housing program will require lenders to offer unemployed borrowers a reduction in their payments for a minimum of three months.

An administration official declined to speak on the record about the new programs but said they would “better assist responsible homeowners who have been affected by the economic crisis through no fault of their own.”

The plan would essentially supplant the government’s earlier mortgage modification plan, announced a year ago with great fanfare.

It has resulted in fewer than 200,000 people getting permanent new loans.

As many as 7 million borrowers are seriously delinquent on their loans and at risk of foreclosure.

The news was greeted with cautious enthusiasm by groups that have tracked the foreclosure crisis and tried to assist communities and underwater homebuyers.

“It sounds really good, and I’m not used to saying that,” said Kevin Stein of the California Reinvestment Coalition in San Francisco.

He said “the two main weaknesses” of the existing federal Home Affordable Modification Program were that,

It didn’t reduce the mortgages of underwater homeowners,

And, didn’t help borrowers who were underemployed or unemployed and would have difficulty qualifying for a loan modification.

“It seems they have taken these issues to heart,” Stein said.

“It’s unclear how many people will qualify – that’s the one hesitation. We’re not sure how broadly these initiatives will reach.”

Martin Eichner, with Project Sentinel in Sunnyvale, said the proposals sound good but he would like to see the details.

“It has to help significant numbers of people and there has to be enforcement,” Eichner said.

“These plans always look great in the first news release, but we’ve often been disappointed in the performance. To the extent that lenders write down principal balances, that would be a significant improvement,” he said.

Eichner said the home affordable effort also needs an enforcement mechanism.

“Without any real consequences, day to day we see lenders ignoring what we think are pretty clear rules under the current making home affordable program,”

While the number of foreclosure-related filings is beginning to flatten or decline, the number of borrowers who are seriously distressed is rising.

In the fourth quarter, the number of households at least 90 days past due on their mortgages swelled by 270,000, according to a report issued Thursday by the Office of the Comptroller of the Currency.

“The government is seeking to persuade people to stay in their homes by aligning the mortgage debt with the asset value, which is the only viable path to real housing stability,” said one person who was briefed on the government’s plans.

Several people who described the plans would speak only on condition of anonymity, since they had not been authorized to disclose details ahead of a White House briefing scheduled for this morning.”

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2. Editorial in the Bay Area News Group – March 29, 2010 – Thank you.

www.mercurynews.com/opinion:

Titled – Foreclosure plan has carrots but needs sticks –

“Eight million households are behind in their payments or in foreclosure. But the Making Home Affordable programs has modified just 200,000 loans.

Forgive us for not jumping up and down with delight over the Obama administration’s latest plan, announced Friday, to help stem the tide of foreclosures.

The changes will help those who are unemployed, underwater or both.

But they have come so late that it’s difficult to muster much enthusiasm.

Banks participation in solving this problem has been optional for too long.

The government must require those who caused this debacle to do more to end it.

Since the foreclosure crisis began three years ago, 6.6 million families have lost their homes, according to the Center for Responsible Lending.

The problem is not getting better.

Eight million households are behind in their payments or foreclosure, and

One in five are underwater – they owe more on their mortgages than their homes are worth.

The administration’s primary tool against foreclosures, the year-old Making Home Affordable partnership with lenders, has so far modified the terms of just 200,000 loans. It is not up to this enormous task.

But the changes announced Friday have the potential to improve that record.

The program will now be open to the unemployed, who previously couldn’t qualify but are a primary victim of foreclosures.

They’ll be eligible to get up to six months’ forbearance and to have their payments lowered to reflect their reduced income, at least for a short time.

Those who owe more than their homes are worth – in California, that’s more than a third of borrowers – may finally be able to get their loan principals reduced.

This much-needed shift in approach addresses another key driver of foreclosure.

Lenders will get incentives to reduce the amount owed.

Borrowers who are current on their payments but underwater – prime candidates to walk away from their mortgages and further weaken the housing market – could refinance into a cheaper government loan.

All of this will help. But the main problem with the government effort remains:

It’s all carrots, no sticks.

Consumer advocates have been pushing Congress for years to allow bankruptcy judges to modify loan terms for primary residences, which could reduce foreclosures up to 20 percent.

The financial industry’s army of lobbyists has managed to beat back that idea, known as “cramdown,” saying it can deal with the problem on its own and through Making Home Affordable.

That’s clearly not the case, because of malice or incompetence.

It would be wonderful if politicians gave the same consideration to desperate homeowners that they do to banks.

Most everyone facing foreclosure nowadays did nothing wrong – they’re simply caught in the cascading wave that began with the subprime mortgage crisis.

The same can’t be said of the banks that got us into this mess and then took billions of taxpayer bailouts.

Allowing judges to modify loans in bankruptcy would add structure to an overwhelmed system.

Reasonable compromises worked out in court would set precedents for lenders to follow.

If they didn’t, they could be forced to by a judge.

Judges have this power for second homes.

There’s no good reason they shouldn’t have it for every home.”
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Comment – Review and Analysis is in progress and will be presented shortly.

Thank you for your patience.

Padmini Arhant

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