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OBAMA ANTI-FORECLOSURE PLAN - PRO & CON

By
Real Estate Agent with FHAllen, Sonoma Country and Vintage

 

The administration's plan for stemming the tide of foreclosures that has been drowning the housing market and threatening the entire economy has several elements. But its focus is on loan modification for homeowners who are under extreme financial stress or hold underwater mortgages. In essence, it provides a framework of rules and incentives to; (1) encourage lenders and servicers to reduce the monthly mortgage payments of homeowners whose mortgage debt is too high as a proportion of monthly income or whose mortgages are "under-water;" and (2) and make refinancing available to homeowners whose loan - to - value is less than 80% through Fannie Mae and Freddie Mac. This plan has sparked spirited debate among housing experts for its scope and workability.

In the plus column the imitative is praised by those who like the plan argue that:

(1) The administrations plan will require real loan modifications that benefit homeowners as opposed to the work-out plans that the lending industry has been calling loan modifications.

(2) The administrations proposal aims at reducing monthly mortgage payments to 31% of income, which will keep homeowners in their homes. Industry initiated modifications aim at 38% of monthly income which still leaves the homeowner under severe financial stress.

(3)The administration plan provides lenders with flexibility with achieving its goals. Lenders/ Servicers can reduce interest rates, extend the term of the mortgage, reduce principle or a combination of all three to get monthly payments down to the 31% target.

 

In the negative column the major criticisms are:

(1) The plan provides for a step up in interest rate on modified loans of 1% a year after 5 years until the rate is equal to the prevailing rate at the time the loan was modified. This provision critics say it just kicks the can down the road and will put borrowers back in financial stress when their loans readjust.

(2) The plan does not require lenders to write down principal despite the decline in housing values. This means that the homeowner will bare all of the losses in the housing downturn.

(3) The plan, in trying to focus narrowly on the "responsible and deserving" homeowners, is overly complex and will be difficult to execute. A better alternative, some critics argue, would be for the government to buy mortgages from the servicers at a discount price and then carry out the loan modifications itself.

A good over view of these issues is Tim Fernholz's article " Is Modification Enough" in the on-line version of The American Prospect.

 

 

 A major complaint I hear from my clients is that the two- tiered system the banks are using to price conformimg loans is just another method of gouging the public.Conforming loans, are those that can be sold to Fannie Mae, Freddie Mac and Ginnie Mae, the so-called government sponsored enterprizes"GSES." This past fall, the Congress raised the conformimg loan amount from $417,000 to $662,500 in high cost areas like Sonoma County in Northern California.The banks however have continued to change a higher interest rate on loans in excess of the $417,000, not withstanding the fact that loans up to the new limit $662,500 are just as secure and credit worthy since they can be sold to the "GSES." So when the banks claim that loans above the original conforming limit ($417,000) but below the new limit ($662,500) ARE SOMEHOW RISKIER they are just blowing SMOKE. What they ARE doing is restoring THEIR balance sheets by overcharging the home buying public, who, as tax-payers, have already contributed to the  multi-billionaire dollar bail out of the banking system. Talk about CHUTZPAH! Shades of Shylock. 

Now is not the time to be playing these games with the over-burdened home owning middle-class, on which the recovery of this economy will ultimately depend.

Posted by

Kathleen Bonham

Vintage Home Specialist

Healdsburg, Santa Rosa, Sebastopol

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