The $700 billion rescue package for the financial system includes measures designed to stem the rising tide of foreclosures. Here’s a look at the specifics.
How does the bailout bill help homeowners facing foreclosure?
The bill provides the Treasury Secretary up to $700 billion to buy troubled mortgages, and securities tied to these mortgages, that are held by banks and other large investors. When these assets come under government control, federal officials are required to “implement a plan that seeks to maximize assistance for homeowners” and use its authority to minimize foreclosures.
Does that differ from what the government and lenders are already doing?
Federal officials have already been encouraging lenders to modify loan terms whenever possible. Mortgage industry experts say most lenders are willing to make modest changes to payment plans to avoid the time and expense of foreclosure, but are reluctant to do so if they determine that the borrower lacks the income to make even modified payments, or if their losses would be too great.
It sounds like the plan doesn’t do much more for troubled homeowners then.
There are different opinions on that. Steven Adamske, spokesman for the U.S. House Financial Services Committee, believes that the government — by becoming an investor in mortgage backed securities — will have new clout to demand that loan servicers modify mortgages.
“If servicers are an impediment (to loan workouts), we can take another look at the industry next year and see if there are other actions we can take to remove road blocks,” he said.
Unlike a private investor or lender, “the government is here to help. We want to rebuild neighborhoods from the ground up,” Adamske said.
But Paul Leonard, California director of the Center for Responsible Lending, a non-profit advocacy group, thinks the measure really won’t help many homeowners. He believes the only way to ensure people stay in their homes is to allow bankruptcy judges to modify or forgive loan terms in bankruptcy cases, which he said could have prevented 600,000 foreclosures. Such a measure has been opposed by mortgage lenders, who say it will discourage banks from making loans.
How many people are currently facing foreclosure?
Nearly 2 million mortgages are delinquent by 60 days or more, putting them at risk of foreclosures. Industry experts say there have been more than 900,000 foreclosures since 2007.
How are loans modified to prevent foreclosures?
Foreclosure prevention is centered on two programs, both of which have “hope” in their name.
A new federal loan workout program called HOPE for Homeowners begins this month, targeting those unable to pay their mortgages. It is for homeowners who bought their homes before 2008 and now have monthly payments exceeding 31 percent of their income.
Under the program, banks would in many cases write-down mortgages to 90 percent of a home’s current value. Such a provision would be important, for many recent homebuyers have mortgages that now greatly exceed their property values.
The new, 30-year-fixed rate loan would be insured by the Federal Housing Administration and could not exceed $550,440.
An existing voluntary effort to prevent foreclosures has been in place since last year. Called HOPE NOW, the program is a joint effort by lenders, mortgage servicers and non-profit housing groups to help troubled homeowners re-negotiate their mortgages. Through this program, borrowers have been able to defer or reschedule monthly payments or reduce their loan principal.
How will I know if the government owns my loan?
Treasury Department officials said this has yet to be determined.
If the legislation is adopted, the Treasury secretary will have 45 days to implement a plan, and presumably these details will become available at that time.
Tom Deutsch, deputy executive director of the American Securitization Forum, a financial industry group, said in many cases one’s loan servicer won’t change even if the government has taken over a mortgage. You can ask your loan servicer who owns your mortgage, but if the government was one of many investors in a mortgage-backed security into which your loan is packaged, you might not be able to tell.
Deustch said the government might also set up a method for borrowers to inquire about who holds their loan.
So what should I do if I want assistance?
Consumer advocates say you should first contact your lender to see if you can adjust the terms to make the payments more affordable.
You can also can also call the HOPE NOW hotline, (888) 995-HOPEInformation on the new federal loan restructuring program is available at .
