Consumer Law

The Government Unveils A New Foreclosure Program

By M. Stan Herring

Our friend Denise Richardson of givemebackmycredit.com has posted an article about a brand new mortgage assistance program that was unveiled on September 8th. But homeowners who are facing foreclosure or are having to deal with crooked mortgage servicers or policies shouldn't get too excited yet.

Only about 421,000 homeowners managed to get permanent mortgage modifications using the government's mortgage programs. This is an incredibly unimpressive number since 1.5 million homeowners received trial modifications and there were 3.1 million loans eligible for program aid. Most applications didn't qualify for permanent modification because of income restrictions or because they quit making payments even after their loan was restructured.

Through July, the loan modification program called HAMP had cost taxpayers $75 Billion. As misguided as the program has been, it at least had some reasonable income and expense requirements for borrowers. The new program throws those requirements out by incenting lenders to make the same types of risky loan decisions that led to the housing collapse in the first place.

The Obama administration's new big program targets homeowners who currently owe more on their homes than they're worth. Banks will have to reduce the principle loan amount by 10%. Once that agreement is made, then the borrower can't surpass a loan-to-value ratio of 97.5% on their first loan, or a total of 115% on the first and second loans.

Put another way, the government is incenting banks to lend money on homes that still won't be worth the amount owed on them, and then the government will guarantee the loan for the bank. That means that if the borrower defaults on the new loan, the government will insure that the bank takes no further losses by backing the loan with your tax dollars. Borrowers will only need to have a credit score of 500.

Believe it or not, the news gets worse. Part of the new program is targeted at the unemployed. The government is going to take taxpayer money to give the unemployed new loans and then guarantee the banks giving the loans will be insured against losses.

It still gets worse. Banks will also be able to choose which homeowners to allow into the program. This means that banks will be more likely to select borrowers with a highest risk of default or whose loans aren't currently insured for the program. Weathering a 10% loss on the loan is a much better alternative for the bank than losing the entire loan through foreclosure. The bank will naturally select the option that offers them minimal loss.

The program will also artificially inflate housing prices, causing another housing bubble, because it will give homeowners (who are going to lose their homes anyway) several more months of homeownership.

If you would like more information on foreclosures, please check out our articles The Three Stages Of Foreclosure In Alabama and Wrongful Foreclosures In Alabama.

If you have further questions or concerns, feel free to contact us through our website or by calling 205-879-2447. You may also obtain a copy of our free book on stopping wrongful foreclosures and the problems of hidden fees by emailing us.

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Full post as published by Alabama Consumer Blog on September 27, 2010 (boomark / email).