The U.S. Government has relied primarily on volunteer efforts by lenders to stop the foreclosure bleeding among America’s mortgage holders.
In some cases individual lending institutions have developed positive ideas that typically reduce monthly payments to roughly one-third of monthly income while generally extending the length of the loan.
Many programs under review by the federal government seek to write down the principle amount on loans to make them more affordable. Opponents to those plans indicate it can hurt property values and creates an environment that is not especially friendly to all homeowners.
FDIC Chairwoman Sheila Bair offered her own take on the crisis in mid November. According to CNNMoney.com Bair’s proposal takes a two-pronged approach to keeping families in their homes. “First, housing payments for delinquent borrowers two months or more late would be reduced to 31% of gross monthly income.” Like other programs discussed this would involve a temporary reduction in loan rates and an increase in the length of the loan. In this case loans could be stretched to 40 years.
“Second, to encourage servicers and investors to participate, the government would share up to 50% of the losses if a borrower who had been helped ended up in default anyway. The risk of re-default had been one obstacle to getting lenders on board with systematic modification plans,” according to CNNMoney.com.
It is believed that roughly 1.5 million homeowners could ultimately remain in their home under Bair’s proposal.
This program also reaches out to lenders and investors by providing lenders with $1,000 for each revised mortgage along with greater assurances from the FDIC to share in the loss on potential mortgage defaults.
More than 2 million homes could go into default status within the next 24 months, which is why Bair’s proposal has some lawmakers anxious to get the ball rolling. Money for the program would likely come from the $700 financial bailout package approved by lawmakers.
Partisan bickering has already been detected with no immediate vote of confidence from Treasury Secretary Henry Paulson while Democratic lawmakers have been very vocal about the potential upside to Bair’s idea.
Reuters.com indicates, “The dispute over housing policy during the administration's final weeks spilled into the public as a the President George W. Bush administration renewed its opposition to using money from the $700 billion bailout fund to support such a foreclosure-prevention program.”
Many Washington insiders do not recall seeing the head of a department push for a plan that did not have the backing of the president, but such is the case with Bair’s proposal. Some have even speculated that president-elect Barak Obama may consider offering Bair a place in his administration.
U.S. President George Bush has been adamant about supporting the restructuring of existing lending institutions without resorting to a ‘spending measure’.
Since the announcement made by Bair it has been interesting to note that her idea has begun to gain both traction and momentum. An increasing number of lawmakers from both sides of the political divide agreed at least in principle with the idea. Some view it as a compliment to existing programs to help bolster lending institutions.
Meanwhile, according to Reuters.com Larry Litton, Jr., president of Litton Loan Servicing, told a Congressional panel on Friday, “Many times these homeowners did not respond to loan modification offers and have simply walked away from their homes.” Some believe that roughly 25% of homeowners who are in default have simply moved on without trying to work through issues their mortgage holder. This statistic causes some to be concerned that the program may not be as effective in practice as it appears on paper.
