The Complications in the Foreclosure Plan

March 2nd, 2009 | Tags: Foreclosure Data

There are many complications in the foreclosure plan and President Obama with his team is wading into a debate raging over the driving force behind foreclosures. The most important facet of the financial crisis raging across America is the foreclosure tidal wave. So far government measures have not made any impact and the same can be said about the private endeavours.

Now President Obama has to take a fresh initiative. On 18th February he promised $75 billion to bring down the amount of monthly mortgage payments of the foreclosure victims. The lenders who cooperated in refinancing were promised subsidies to match from the government. The target was to see that the mortgage payments did not exceed 31% of their earnings and that the contract extended up to a period of five years. The servicers have also been given incentives. They will get fees for the successful modifications.

The carrot also comes with a stick. Obama stressed that his purpose was to change the bankruptcy code so that courts were empowered to bring down the principal amount. The details depend upon final talks with the Congress.

During the past three years over 5 million homes have been foreclosed upon. According to Credit Suisse another 9 million more will fall into the same soup in the coming four years. In normal times less than 1m foreclosures are noted each year.

President Obama anticipates that his measures will stop about 4 million foreclosures. In another separate move 5 million borrowers will get the facility of refinancing their loans at lower rates even if the equity is less than 20% that is generally stipulated by Fannie Mae and Freddie Mac.

In the recent past, less comprehensive endeavours to stall foreclosures have failed. In the first step Bush had aimed to help 240,000 failing sub-prime borrowers to refinance with government backed mortgages having fixed rates. Only 4,000 benefited from it. Another plan backed by the Democrats involving $300 billion to guarantee about 400,000 victims was reduced to a whimper with only 517 applicants. The lenders were adamant about not reducing the principal amount. Programmes launched by the private sector have been relatively more successful.

The success of the efforts of the new government depends upon correctly analyzing the driving fuel behind foreclosures. Perhaps the house owners do not have the capability to pay or perhaps they are refusing to comply because their houses are worth less than the loan amount.