Foreclosure Rescue Plan Hampered By Multiple Causes

December 2nd, 2008 | Tags: Foreclosures

Foreclosure rescue plans are being hampered by multiple causes – the most important being the pivotal role of the voluntary participation of lenders. Another big hurdle is the securitized mortgages and the negligible role of servicers to modify loans.

JP Morgan and Citigroup are addressing their rescue plans only to those mortgages having single lenders. JP Morgan (tackling loans worth $70 billion) is being criticized for not reducing the total debt of the borrowers. Citigroup (tackling loans worth $20 billion) plans would benefit 500,000 foreclosure victims. It involves reduction in rates and in some cases principal. Also the term of the mortgage will be extended to quite a good number of years.

Other banks will postpone foreclosures while talks for negotiation are on. The general flaw in all these plans is that the principal is not being permanently reduced. This results in many walking away from a house that is not worth the amount one is being asked to pay. Reduction or principal entails loss. Experts say that the borrower, the lender cum investor as well as the government should share this loss. If the entire load is put on the borrower then foreclosures are inevitable. More foreclosures will cause a deeper recession than feared. The critical point is to get rid of the negative equity.

So far FDIC has offered the best remedial measure in early November. It was an improvement on the shortcomings of the measures FDIC took to address the foreclosure problems taken over from IndyMac. In July FDIC ruled reduction in principal and interest cuts – it going down to the low level of 3%. This resulted in the average reduction of the monthly mortgage payment by 23%. By taking over IndyMac, FDIC took over the responsibility of 653,000 mortgages. Of these 60,000 were seriously delinquent and facing foreclosure or bankruptcy. Nearly 40,000 loans were eligible for modification and by the middle of November 5,000 had been cleared.

In the November programme of FDIC, 1.4 million borrowers, late by 60 days till June 2008, will benefit. By 2009 it is feared that 3 million more will be facing foreclosure. Of these 2.2 million are likely to be helped by modification. The target is to see that the borrower’s monthly mortgage payment is less than 31% of the person’s income.

The Bush government has not given the green signal to the programme but it is hoped that this hurdle will be overcome when President-elect Barack Obama takes over the reins.