The Secretive Welfare Foreclosure Preventive Programme of The Treasury

December 15th, 2008 | Tags: Foreclosure

The Treasury has been nursing a secretive jumbo foreclosure preventive welfare programme. Recently Ben Bernanke, the chairperson of the Federal Reserve called for its further expansion. The Treasury and the federal agencies have been methodically encouraging the banks to waive mortgage dues. The whole thing is informal and without the clear green signal from the Congress.

A hypothetical example will clarify the point. A and his wife B were both working in 2005 when they bought a house by taking a mortgage equal to what the family would earn in four years. This made them committed to pay one quarter of their monthly income towards mortgage payments each month. Today the worth of the house is equivalent to income of three years. To make matters worse the income figure has gone down with job losses. This makes the monthly mortgage payment half of the family earnings.

In such a situation it will be best for the couple not to find a fresh job. The mortgage lender, say C (that is going to benefit from the rescue deal of the Treasury) is amenable to negotiate with those borrowers who are in money trouble. The new deal will limit their monthly payments to 38% of their income. Thus only those who are unemployed or half-employed will qualify for this deal involving loans. If a new job is suddenly found then the qualification will vanish!

These forgiveness schemes that are being pushed by federal agencies are real and not hypothetical. Fannie Mae and Freddie Mac are introducing “Streamlined Modification Program” from 15th December. A number of other banks will be toeing the line and bring down the mortgage payment to 38% of the income of the borrower. About 1 million borrowers will benefit. Bernanke gave kudos to such moves and added that the figure should be brought down to 31% of the income instead of 38%.

Programmes like these really do not make sense. Borrowers who earn more are being made to pay more to the lenders. It is tantamount to the lender levying some sort of new income tax over and above that being charged by the treasuries.

The irony is that both President Bush and President-elect Obama have agreed not to introduce a fresh income tax of 38% - and definitely not without the approval of the Congress. But unwittingly Fannie Mae, Freddie Mac and other banks are unknowingly doing exactly this very thing.