Desperate times call for more effective measures. Treasury Department Secretary Henry Paulson’s appeals for the private sector to willingly adjust loans of homeowners facing foreclosure only succeeded in modifying a little over 4 percent of troubled loans each month. Instead, billions of dollars are being showered on financial institutions instead of helping homeowners in a foreclosure crisis.
The first thing to do is to give judges the right to alter primary residential mortgages of homeowners with foreclosure problems. There is no reason for not allowing this when mortgages on home for investment and vacation homes can be modified in bankruptcy court.
Secondly, government should seriously consider the foreclosure prevention program proposed by the Federal Deposit Insurance Corp. under its Chairwoman Sheila Bair.
Bair’s anti-foreclosure proposal would help an expected 1.5 million homeowners. Borrowers who are at least two months delayed on their payments are eligible for adjustment of their monthly payments, with the adjusted rate not exceeding 31 percent of the borrower’s income.
Mortgage rates could be lowered to 3 percent, or mortgages could be extended to 40 years from 30 years. Aside from this, principal payments could be deferred and the borrower will be wholly responsible for the loan’s full value. According to Bair, if home prices are prevented from going down an additional 3 percent, a homeowners’ equity of $500 billion would be saved.
The deal is also beneficial for mortgage companies since government is required to give them 50 percent of their losses in case the borrower defaults. The guarantee would start after the homeowner makes 6 of the adjusted payments, and is good for eight years.
Critics say that the plan would encourage those with high interest mortgages to default, and private companies to let government shoulder its expenses. However, the FDIC proposal has been successful with thousands of Indy Mac home loans. During these times of crisis, a $24.4 billion expense under the FDIC anti-foreclosure plan seems like a bargain.
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