Plan to Offset Foreclosures Wrong for Evolving Mortgage Crisis

Despite offering a rising number of trial loan modifications, the Obama administration’s housing-rescue efforts are increasingly ill-suited 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 ambitious effort to prevent foreclosures isn’t set up to help the current drivers of foreclosures: borrowers with with complex mortgages and those good credit who have lost their jobs.

Eligible borrowers who are behind on their mortgage payments can reduce their monthly payments under the Home Affordable Modification Program. A companion program allows eligible borrowers to refinance their home loan 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 higher default rates in the future.

The report was released one day after the Obama administration said the housing-rescue program had met a key benchmark by offering trial loan modifications to 500,000 homeowners. HAMP The report stated that Obama’s program is targeting the housing crisis as it existed six months ago, rather than as it exists right now. 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, dramatically increasing monthly payments. By reducing the interest rate or extending the loan over a longer term, monthly payments may become more affordable. The current wave of defaults is being driven by borrowers with good credit who have lost their jobs and can’t afford to make any mortgage payments. Another category of troubled borrowers have complex home loans that can’t be easily modified without writing down the loan balance, which mortgage companies have been reluctant to do.

This report did actually bring a call to action. The oversight panel, which approved the report on a 3-2 vote, called for the administration to update the strategy to address this new wave of troubled borrowers. 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 lead to more successful modifications.
California Home Mortgage Services by SD Mortgage Group. Our 58 years of experience in California home mortgages make us your best home finance option.

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