Mortgage Foreclosure Bailouts: Do They Help or Hurt?

The list of suggested solutions to the mortgage foreclosures arising from the sub prime lender crisis continues to get longer. And the list of those against any bailout is following suit. There is, of course, a difference between steps that can be taken to prevent foreclosures and a bailout, but many people fail to recognize the difference and remain steadfastly against both. Some economists even believe that proposed remedies might do just the opposite of what they are for, and actually make things worse.

Proponents of broadly-based foreclosure prevention efforts say that they have a greater positive role to play than just helping individuals. They argue that in reality, these ‘cures’ would prevent entire neighborhoods from dropping way down in value and, in turn, hurting all homeowners. As of October, 2007, predictions are that an estimated 1.7 million additional foreclosures will take place by December 31, 2008.

Help May Be On The Way The National Training Information Center, which is a consortium of community organizations who work closely with borrowers to arrange loan workouts with their lenders, has asked lenders to place a two-year moratorium on resetting adjustable rate mortgages (ARMs). And the lenders themselves have various loss-mitigation methods on hand to prevent foreclosures if they wish to use them. As an example, they can always convert ARMs to fixed-rate loans or extend the lower introductory ARM rates for an extra one or two years. They can also add arrearages to the loan balance or extend the loan’s length to lower the monthly payments.

Or Perhaps Not To date, few lenders have shown a willingness to work with borrowers to modify their mortgage loans before they become delinquent. And if they do, they tend to take steps to delay foreclosure somewhat, not prevent it. Experts within the mortgage business claim that most lenders do not have adequate staff on board to work with all the borrowers asking for modifications. In addition, they may be prevented from doing so as a result of the terms and conditions of the contracts they have with the investors who own the loans.

One bill is before the courts that would allow bankruptcy judges to reduce the amount homeowners owe to their lenders when filing for Chapter 13 relief. However, critics believe that such actions could cause the mortgage market to be destabilized and push mortgage rates still higher. And the Federal Housing Administration (FHA) is considering a program that might permit more than 80,000 delinquent borrowers the ability to refinance into more affordable loans. As you might anticipate, critics of this concept believe that the FHA would be taking a greater risk that potentially endangers taxpayers. Finally, everybody seems to be in favor of a plan that would permit homeowners who foreclose or succeed in not having to pay all of their debt to deduct this amount from the taxes they owe. But little progress has been made so far on this idea.

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