Sunday, April 18, 2010

Federal mortgage help not working

In its latest report, the Congressional Oversight Panel notes that the programs initiated by the Treasury Department to help homeowners facing foreclosure have not been effective. Fewer than 200,000 people have been permanently helped by the programs so far. I do not think this should be a surprise to anyone.

What incentive do the banks have to help homeowners facing foreclosure? The government bailed them out and continues to offer help as more foreclosures pile up. Participation in all of Treasury’s programs so far has been voluntary for the banks. A new requirement that loan servicers explain to homeowners why their loan modification has been declined is not going to increase the number of modifications. New efforts to get banks to write down principal loan amounts to bring loans in line with actual house values has gained no traction, even with one out of four mortgages currently being upside down.

What incentive does a homeowner have to apply for help through these Treasury Department programs? With second mortgages, credit cards, car loans and other debt, most homeowners would still pay nearly 60% of their income towards debt service even with reduced first mortgage payments. If they do attain a “best case” 5-year payment reduction, the homeowner will probably still be upside down and looking at higher payments once again.

Lenders and borrowers both seem slightly confused by the trickle of modifications to existing programs and new programs that keeps coming from Treasury. No-one seems to know whether to try to modify a mortgage now or wait a few months to see if something better comes along. Homeowners have seemingly been stuck in a non-stop cycle of applying to lenders for help, being denied after multiple delays and then being encouraged to apply for help again under a new or changed program, only to be denied yet again.

Meanwhile, more and more homes are foreclosed upon. Housing prices seem to be stabilizing in parts of the country but are still plummeting in some major cities. And the banks are once again profitable thanks to the federal government bail-outs.

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