Mortgage 'Fix' Not Helpful to Troubled Homeowners

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Mortgage 'Fix' Not Helpful to Troubled Homeowners

With one in 10 American mortgage-holders at least one month behind on their payments, the Treasury Department is coming up with yet another "fix" for the Great American Mortgage Crisis - which, not surprisingly, will do little to directly help current mortgage-holders.

Under the Treasury's latest proposal, the government would invest tens of billions of dollars to help lower the interest rate on 30-year mortgages to just 4.5 percent, which would be the lowest rate since the early 1960s.

"Wow!" you may be thinking. "Who cares about the mortgage crisis? With those kinds of terms, I'd be ready to go out and refinance my home."

But here's the catch. As currently envisioned, that 4.5 percent rate would not be available for refinancing. Which means it would not be available to any of the people who are currently underwater on their loans.

The rate would only be available if you're buying a home.

"Once again, the government's not addressing the problem head-on by trying to reduce foreclosures," said Kurt Eggert, a former member of the Federal Reserve's Consumer Advisory Council who teaches law at Chapman University in Orange. "This stimulus is coming to the people who need help the least. The people who need help the most - the people who got stuck with subprime loans - are getting the least amount of help."

That's been a pattern that the Treasury Department has followed for much of the past year.

Since June, Treasury Secretary Hank Paulson has crafted more than $1 trillion worth of bailout plans for Wall Street investment firms and major banking institutions. But for some reason, he has been gun-shy about providing direct aid to homeowners who are struggling to pay off nonsensical loans that were offered by the very firms that have gotten bailouts.

Paulson has balked at suggestions that banks should be forced to modify their loans to troubled homeowners. Instead, he prefers a kind of "trickle down" approach - lend to the institutions so they can lend to borrowers and revivify the market. But the institutions have not been lending. Instead, they have been keeping the money in their coffers.
In the meantime, the number of troubled borrowers is increasing.

During the third quarter, a record one in 10 American homeowners with a mortgage was at least a month behind on their payments or in foreclosure, the Mortgage Bankers Association reported Friday. That compares with 7.3 percent a year ago.

Rising unemployment will probably push that number upward. Between September and November, nearly 1.3 million workers lost their jobs, pushing the official unemployment rate to 6.7 percent, according to data released Friday.

The Federal Reserve estimates that by the end of the year, 2.2 million people will have been foreclosed upon in 2008, more than double the average number in recent years.

Is there any way of stemming this flood of foreclosures?

The Federal Deposit Insurance Corp., under the leadership of Sheila Bair, has crafted a plan to reduce the monthly payments of troubled homeowners to just 31 percent of the borrower's income, by modifying the interest rates as well as the amount of principal on the loans. Another proposal would have the government buy delinquent or at-risk mortgages in bulk and then refinance them through the Federal Housing Administration.

Those proposals have drawn a lukewarm response from Paulson, whose background on Wall Street, where he was once the chief executive of Goldman Sachs, may color his views.

It would be nice if Paulson could see things that clearly. "But Paulson doesn't seem to believe in the importance of loan modifications," Eggert said. "As long as he's running the show, I don't think we'll see any significant steps taken along those lines.

posted by MORTGAGE AUDIT SERVICE December 09, 2008 1:59 AM

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