Another Loan Modification Initiative

The Governments Expanded Loan Modification Effort

The governments’ latest attempt to curtail the anticipated foreclosure crisis is eerily similar to the bail out of AIG. I was always curious why after the first $85 billion loan we so readily wrote another check to the financial institution for another $37.8 billion dollars because they “miscalculated” something. Miscalculated? That sounded more like a broken calculator. Sorry, I digress from time to time. The first Loan Modification initiative which hoped to help 3 to 4 million homeowners only helped 170,000. Again, this is not a miscalculation. This initiative did not work.

While I have never professed to have all of the answers I have proclaimed to have a lot of questions. A bank would never lend a homeowner, home builder or business a second loan because they “miscalculated”. Yet, now that I own the bank, (the treasury) we are doing just that. I am not sure that the decision makers are even listening to themselves. I keep hearing that the reason the government can not keep people in their homes is because the majority of loans are held in pools owned by lots of investors (to complicated for us to understand). Hence the servicers are not in a position to make the necessary changes. Okay. If that is factual how with the new initiative work? Here is the proposal:

Principal reduction: The new initiative encourages servicers to reduce loan principal for delinquent borrowers when that is more advantageous to mortgage investors than reducing interest rates. While lowering balances would remain optional, many servicers are required by contract to do what is in the investor’s best financial interest. Servicers and second-lien holders would receive financial incentives to write down principal.

Principal reduction would be available for HAMP-eligible borrowers who owe more than 115% of their home’s current value. The balance would be forgiven as long as the homeowner makes timely payments for three years.

FHA refinance: Some borrowers who are current on their mortgages but have seen their property values drop could refinance into Federal Housing Administration loans worth no more than 97.75% of their home’s price.

Separately, the government will double the incentive to servicers to complete a HAMP modification, to $2,000, and provide more funds to second-lien holders that release borrowers from their debt. It will also double relocation assistance to borrowers who cannot afford to stay in their homes to $3,000.

If the servicers are mechanically unable to make the changes in the first initiative how will the incentive mentioned above help? I am sure that the answer to the question is also too complicated for us to understand.  Let’s see where our Bailout money went.

Please do not misunderstand this post. I believe that there is a definite need to help those unemployed and those who owe more than their home is worth. I believe it is in all of our best interest to keep people in their homes. The goal is not what I am questioning but rather the execution that gets us to the desired goal. If we could possibly learn from our mistakes we would not have lent AIG a second loan and we would have pressured the banks to lend us out of the “property value crisis.”

Please. To Whom It May Concern: Please look at what Pennsylvania Housing Finance has done. With a lot less money at their disposal they are helping a great number of people. $450 million was distributed to keep $43,000 people in their homes. Do that math. $75 billion should help 716,666 people stay in their homes. While that is not the goal we are being sold it is a far cry from the 170,000 they helped in the first try.

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