Programs help struggling homeowners
Talk about being conflicted. I have never before in my adult financial life had both sides of my brain in a continuing battle. One side is asking me, "Why are we giving so much financial help to homeowners in trouble?" while the other side is slapping me around saying, “What’s wrong with you? It’s the only way to get out of this.” It looks like the federal government’s brain is also having the same conflict because at the end of March it unveiled another plan to help struggling homeowners.
The government’s existing loan modification program has failed to make a dent in the foreclosure problem. Of the 1.1 million homeowners who began the modification process over a year ago, only 170,000 have been successful in completing the process. Changing qualification parameters and stacks of paperwork have produced a huge backlog, accomplishing very little.
Because of this, the government is enhancing the program with the hope that its original goal of helping three to four million borrowers avoid foreclosure can be met. The new effort is designed to help two groups of homeowners in trouble.
The first group is borrowers who are underwater, those who owe more on their loans than their houses are worth. This is estimated to be nearly 15 million with about 10 million of them owing at least 20 percent more than their home’s current value. Thy have two options – their mortgage company can cut the total amount they owe on their mortgage, or they can refinance into loans backed by the Federal Housing Administration (FHA) ,which insures loans against default and is funded by the federal bailout fund to the tune of $14 billion.
The second group of homeowners that may get some help under this new program are unemployed or underemployed borrowers. They could see their mortgage payments drop to no more than 31 percent of their monthly income, but only for three to six months. The intention is to give them more time to find jobs, and once they do, they may qualify for loan modifications that would permanently reduce their payments.
There is also a benefit to the banks and mortgage lenders in this program. Not only will they avoid a foreclosure process, which generally costs between $40,000 and $50,000 per home, but they will also receive incentive payments from the government for participating in the program. As with other government programs, only homes that are a primary residence are eligible, excluding investment properties and second homes. However, there is no limit on the size of the underwater mortgages or income levels, so high valued homes and high earners can also benefit.
Of course, the underlying problem in the foreclosure mess is unemployment, and until that starts getting resolved, no amount of re-equifying or payment modifications are going bring it to an end. Mark Zandi, chief economist at Moody’s, feels that although the program will not eliminate the problem, it may help bring it to a quicker end. Likewise, the government has been very careful to downplay that this new plan would solve the foreclosure epidemic. Its position is that it is only one step to help the estimated six million homeowners who have missed at least two months of payments. The government Web site www.financialstability.gov will give interested homeowners more detailed information.
My brain and I are exhausted and are hoping this is the end of the conflict, but something tells me I’ll be writing about this problem again probably for a long time. In the meantime, I think my brain needs a nap.
