New Rescue Plan To Embrace Loan Principal Reduction, Offering Aid For Jobless Borrowers

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March 26^th, 2010

 

The public outcry of government bail outs of banks and the poor success of the loan modification program have urged the U.S. government to unveil yet another new plan to curb the foreclosure crisis.

 

As the foreclosure problem evolved into millions of jobless homeowners watching their home values plummet, the new rescue plan is designed to aid 2 groups of borrowers.

 

1. Borrowers whose mortgage balances exceed the current value of their homes.

 

According to Moody’s analytics, 15 million homeowners fall into this category. An estimated 10 million homeowners owe more than 20% or more than the current value of their homes. The proposed solution is to have mortgage companies reduce the total amount owed or perform principal reduction on these loans. The alternative is to refinance into loans backed by the Federal Housing Administration (FHA). To facilitate this solution, FHA will receive $14 billion in incentive money from the federal bailout fund.

 

2. Unemployed Borrowers

 

Jobless homeowners who are receiving unemployment benefits will get their mortgage payments reduced to not more than 31% of their monthly income for a period of 3 to 6 months. The provision grants the jobless homeowner more time to find work. Upon getting a new job, they maybe considered or qualify for a loan modification that will permanently reduce their mortgage payments under Home Affordable Modification Program (HAMP).

 

The plan is expected to aid 3 to 4 million borrowers from falling into foreclosure, the same number announced last year when the government rolled out its original plan in February, March of 2009.

 

The new plan was the result of several months in roundtable discussions between the Treasury Department, major banks and investors in mortgage securities. The 3 parties have come together to agree on restructuring loans for home borrowers.

 

Mark Zandi, famed chief economist of Moody’s analytics argued that the new changes and efforts may help prevent not more than 1.5 million foreclosures.

 

The new plan does pose some challenges and risks. The plan relies on investors who bought the troubled loans in the form of a bundled mortgage security to approve the reductions of the loan principal. Most of these loans are not owned by the banks themselves but were sold in a bundled mortgage security to world-wide investors through Wall Street. There are common disputes between banks and investors regarding the issue of getting the investor to agree to a cut in the loan principal. This translates into the investor receiving less. At the end of the day, it would require the investors’ nod into making these reductions. In addition to other risks, another spiral in home values can potentially derail the new government’s rescue effort.

 

Others hailed the plan as a new milestone as we finally start to embrace the path of reducing loan principal for struggling borrowers who have seen their home values plummet. The previous government loan modification efforts of reducing interest payments have not really worked combined with the event of falling home values.

 

Banking officials on the other hand are optimistic that investors will cooperate in agreeing to a principal reduction or a modification. Scott Talbott, chief lobbyist for the Financial Services Roundtable said that investors will have to be realistic. If the investor chooses to modify the mortgage, the borrower gets to remain in their home. However, if he chooses not to, there is a risk of the homeowner falling into foreclosure and causing the investor to lose it all.

 

The administration stays firm on their position indicating that irresponsible borrowers who live in million dollar homes or speculators will not benefit from the new updated program.  

 

White House economic advisor, Diana Farrell says that the new plan will not save 10 to 12 million homeowners expected to lose their homes to foreclosure over the next 3 years. She said succeeding in such a big feat will be too expensive and unfair to other responsible folks. In reality, too many people have gotten homes that they couldn’t simply afford.  

 

 

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News Archive

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