Tuesday, February 12, 2008

A Lifeline In The Mortgage Mess

From: http://www.forbes.com/business/2008/02/12/mortgages-congress-bush-biz-beltway-cx_bw_0212mortgage.html

Tuesday, the Treasury Department, the Department of Housing and Urban Development and six mortgage servicers announced a plan that would give seriously delinquent borrowers a 30-day reprieve from looming foreclosures so they can renegotiate the terms of their loans.
It comes just over two months after the administration unveiled a separate program to freeze "teaser" rates on some adjustable-rate mortgages. The move was put in place to prevent 1.2 million mortgages from resetting to higher rates and putting borrowers in greater danger of foreclosure.
That plan was widely criticized because it didn't provide assistance to borrowers already in default on their loans. The plan announced Tuesday, called "Project Lifeline," fixes that problem, sort of--it helps borrowers three months in arrears. But it's also got some kinks of its own.
Primarily, it doesn't guarantee borrowers assistance. Under the plan, six major loan servicers--Countrywide Financial (nyse: CFC - news - people ), Bank of America (nyse: BAC - news - people ), Citigroup (nyse: C - news - people ), JPMorgan Chase (nyse: JPM - news - people ), Wells Fargo (nyse: WFC - news - people ) and Washington Mutual (nyse: WM - news - people )--will send out letters to borrowers who are at least 90 days past due to let them know their loan is being considered for the 30 day "pause." (This is not a moratorium). Borrowers have 10 days to respond.
Borrowers' situations will be handled on a case-by-case basis, and for this reason, the administration doesn't know how many borrowers will be affected, though the number is expected to be in the "hundreds of thousands." And while the plan includes subprime, prime and home equity loans, it leaves out those that are in active bankruptcy, those that are in active foreclosure with the sale date 30 days away, investment properties and vacant homes.
In addition, the plan does not alter the outstanding loan amount. It simply allows the repayment terms to be altered.
The idea behind Project Lifeline is not new. If mortgage servicers wish, they are free to renegotiate the terms of any borrowers' loan at any time. The current plan, however, is the first time major industry players have worked in concert to stall foreclosures on seriously delinquent loans. The six firms account for about 50% of all U.S. mortgages, and they are all part of an administration-backed private-sector alliance to lessen the damage caused by the subprime crisis, known as HOPE NOW.
The administration appears to be earnest in helping borrowers. A spate of mass foreclosures--which no one on either side of the aisle wants--does nothing to buoy the economy. The White House predicts the economy will rebound in the second half of 2008. It's better to look busy now than to be accused in November of not acting at all.
But so far, the Bush administration's efforts have been met with political opposition.
The National Community Reinvestment Coalition (NCRC), a group of about 600 community organizations, has proposed that the federal government buy securitized loans at a discount. At that point, the terms could be renegotiated with the input of the private sector.
John Taylor, NCRC's president and chief executive officer, says the government waited too long to react, failing to realize that the mortgage meltdown was more than just an aberration that would be corrected by the markets. "It's a classic case of tripping over your ideology," he says.
Senate Banking Committee Chairman Chris Dodd, D-Conn., blasted Project Lifeline: "This plan, while a step in the right direction, will not stem the tide of the millions of foreclosures we are facing in the coming months," he said.
His proposal: The government should set up a company to buy the loans and readjust their terms. Good luck there--the time involved with creating a new government entity is anyone's guess. And the cost? Yikes.

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