Finally, Some Real Oxygen for the Drowning

The rising tide of home foreclosures continues to be one of the biggest potential drags on economic recovery. Here’s the latest news on the that front:

The Obama administration on Friday announced broad new initiatives to help troubled homeowners, potentially refinancing millions of them into fresh government-backed mortgages with lower payments.

….The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

For an example of “protests among those who have kept up their payments and are not in trouble,” here’s a letter reprinted by Tom Brown from a reader who learned about Bank of America’s plan to begin forgiving mortgage principal for some delinquent borrowers:

I am writing to inform you that I will never bank with your firm ever again.

Principal forgiveness is an affront to every responsible, non-delinquent borrower in your book of assets….You are rewarding those who bit off more than they could chew, while those who did not take on excess leverage, or who kept their income-to-debt ratios manageable, see no benefit, even as their home equity values have declined….Moral hazard be damned. Count me as one future cashflow stream you will never see again!

Roger that — and I suspect that this is a more common reaction than you’d think. Bailing out Wall Street is bad enough, but bailing out your profligate next-door neighbor is far, far worse.

Of course, so far none of these plans to mitigate foreclosures has worked anyway. This time, however, CAP’s Andrew Jakabovics says the administration’s plan has a real shot at succeeding:

The big news is that the administration has come up with the first systematic set of policies to address the problem of negative equity (homeowners owing more than their home is worth) by bringing mortgages down to the current value of the properties.

….In what is essentially a modern version of the New Deal’s Home Owners’ Loan Corporation, a borrower who is current on her loan but who owes more on her home than it is currently worth can refinance into an FHA loan for 97 percent of the property’s current value. Incentives will be paid to servicers to allow these borrowers to refinance for less than the outstanding amount. Given the much larger losses lienholders would face if borrowers defaulted, cash in hand may be sufficiently attractive to allow these short-refis to proceed.

….Implementing these changes to HAMP will be difficult, and the issue of second liens remains a challenge, but insofar as the FHA refi program can largely sidestep the issue of servicer capacity, it has significant potential to alleviate the foreclosure crisis.

More at the link.

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