When the Obama administration offered $75 billion as an incentive to lenders to modify mortgages and help homeowners keep their homes, they overlooked one important fact: The plan was a suggestion, not a requirement.
So in spite of the fact that the banks received bail-out funds, they were under no obligation to return the favor by assisting troubled homeowners. To date, only 100,000 homeowners have been offered loan modifications, and fewer have taken the offer.
Why? According to “tales from the front,” one reason is that many of those loan modifications come with the requirement of a large lump sum payment. If those homeowners had the money for a lump sum payment, they wouldn’t have needed help with monthly payments.
Subsequent “fixes” have been equally ineffective. The Federal government has essentially said “Our regulations now allow you to do this to help. You don’t have to, but we hope you will.”
Why don’t they accept the incentives to help homeowners?
Because in their estimation, they will see a greater profit from taking the homes in foreclosure. Mortgage insurance, government guarantees against loss, and monthly profits for asset management companies apparently outweigh the incentives offered for helping homeowners.
As of now, approximately 4.2 million properties have been foreclosed, and experts forecast that the total will come to 10 million by the end of 2012. According to the Mortgage Bankers Association, 5.4 million mortgages are currently delinquent or in the formal stages of foreclosure.
But this could become more severe. Experts estimate that 16 million borrowers owe more on their homes than those homes will bring in today’s market. In addition, one third of homeowners surveyed say they’ll simply walk away from their mortgages if values continue to fall.
The latest regulation directs banks to offer 12 months of forbearance for unemployed homeowners. Unfortunately, this regulation is also filled with loopholes that allow banks to ignore it. We can only hope that this time they will cooperate, since forbearance means postponing collection rather than forgiving balances due.
Is the solution more government programs? Not unless banks are required to participate.
Is the solution a halt to all government participation in the housing market – including both guarantees and incentives? Many believe so, but we’re not likely to find out.
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