Foreclosure Plan Not Suited for Evolving Mortgage Crisis

Even with loan modification programs now in place, the Obama administration’s housing-rescue efforts are not adapting to address the changing nature of the foreclosure crisis, according to a report released by a watchdog panel. The report, from a bipartisan panel was created to oversee the government’s $700 billion financial bailout. This report concluded that the financial bailout plan isn’t set up to help the true foreclosure causes: borrowers with good credit who have lost their jobs and those with complex mortgage.

Under the Home Affordable Modification Program, or HAMP, eligible borrowers who are behind on their mortgage payments can reduce their monthly payments. A similar program allows eligible homeowners to refinance their mortgage if they have little or no equity in their home. But modifying loans for unemployed borrowers who are unable to afford even reduced payments will likely lead to even more foreclosures in the future.

The report was released one day after the Obama administration said it had met a key benchmark for the housing-rescue program by offering trial loan modifications to half of a million homeowners. HAMP The report stated that Obama’s housing program is modeled around the housing crisis as it existed six months ago, rather than it’s current state. Even trial loan modifications might not lead to a permanent fix, and the homeowners who do receive a permanent mortgage modification will see payments rise after five years. This will likely lead to a foreclosure delay rather than prevention.

Foreclosure efforts so far were designed to modify subprime adjustable-rate mortgages and other risky loans that have gone past due as interest rates adjusted, making loans unaffordable. By reducing the interest rate or extending the loan over a longer term, monthly payments may become more affordable. The current wave of trouble is being driven by borrowers with good credit who have lost their jobs and can not afford to make any mortgage payments. Another category of troubled borrowers have complex mortgages that can’t be easily modified without writing down the loan balance, which is unlikely due to the financial crisis.

There has been some motion generated by this report. The oversight panel, which approved the report on a 3-2 vote, called for the administration to expand the scope of the effort to address this new wave of borrower defaults. The Treasury Department said that they continue to study further ways to help unemployed homeowners. Senate Democrats introduced a bill to offer federal funds for states to offer mortgage assistance to unemployed borrowers. Policy makers are also considering proposals that would allow lenders to lower payments beyond the requirements of the HAMP program for unemployed homeowners. The vast majority of modifications have not included writing down loan balances, which many experts believe would facilitate more successful modifications.
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