Tuesday, October 7, 2008

I want the Government to Bail Me Out of Foreclosure!

The rescue package for the financial system includes measures designed to stem the rising tide of foreclosures. Here's a look at the specifics.

The $700-billion rescue package for the financial system includes measures designed to stem the rising tide of foreclosures. Here's a look at the specifics.

How does the bailout plan help homeowners facing foreclosure?

The plan provides the Treasury secretary as much as $700 billion to buy troubled mortgages, and securities tied to these mortgages, that are held by banks and other large investors. When these assets come under government control, federal officials are required to "implement a plan that seeks to maximize assistance for homeowners" and use their authority to minimize foreclosures.

Does that differ from what the government and lenders are already doing?

Federal officials have already been encouraging lenders to modify loan terms whenever possible. Mortgage industry experts say most lenders are willing to make modest changes to payment plans to avoid the time and expense of foreclosure but are reluctant to do so if they determine that the borrower lacks the income to make even modified payments or if their losses would be too great.

It sounds as if the plan doesn't do much more for troubled homeowners then.

There are different opinions on that. Steven Adamske, spokesman for the House Financial Services Committee, believes that the government -- by becoming an investor in mortgage-backed securities -- will have new clout to demand that loan servicers modify mortgages. "If servicers are an impediment [to loan workouts] we can take another look at the industry next year and see if there are other actions we can take to remove roadblocks," he said.

Unlike a private investor or lender, "the government is here to help. We want to rebuild neighborhoods from the ground up," Adamske said.

But Paul Leonard, California director of the Center for Responsible Lending, a nonprofit advocacy group, thinks the measure really won't help many homeowners. He believes the only way to ensure people stay in their homes is to allow bankruptcy judges to modify or forgive loan terms in bankruptcy cases, which he said could have prevented 600,000 foreclosures. Such a measure has been opposed by mortgage lenders, who say it would discourage banks from making loans.

How many people are currently facing foreclosure?

Nearly 2 million mortgages are delinquent by 60 days or more, putting them at risk of foreclosure. Industry experts say there have been more than 900,000 foreclosures since 2007.

How are loans modified to prevent foreclosures?

Foreclosure prevention is centered on two programs, both of which have "hope" in their name.

A new federal loan workout program called Hope for Homeowners begins this month, targeting those unable to pay their mortgages. It is for homeowners who bought their homes before 2008 and now have monthly payments exceeding 31% of their income.

Under the program, banks would in many cases write down mortgages to 90% of a home's current value. Such a provision would be important in California, where many recent home buyers have mortgages that now greatly exceed their property values.

The new 30-year fixed-rate loan would be insured by the Federal Housing Administration and could not exceed $550,440.

An existing voluntary effort to prevent foreclosures has been in place since last year. Called Hope Now, the program is a joint effort by lenders, mortgage servicers and nonprofit housing groups to help troubled homeowners renegotiate their mortgages. Through this program, borrowers have been able to defer or reschedule monthly payments or reduce their loan principal.

How will I know whether the government owns my loan?

This has yet to be determined. The Treasury secretary will have 45 days to implement a plan, and presumably these details will become available at that time.

Tom Deutsch, deputy executive director of the American Securitization Forum, a financial industry group, said that in many cases the loan servicer won't change even if the government has taken over a mortgage. You can ask your loan servicer who owns your mortgage, but if the government was one of many investors in a mortgage-backed security into which your loan is packaged, you might not be able to tell.

Deutsch said the government might also set up a method for borrowers to inquire about who holds their loans.

So what should I do if I want assistance?

Consumer advocates say you should first contact your lender to see whether you can adjust the terms to make the payments more affordable.

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