New Mortgage Rescue Plan Announced; Critics Say It Doesn't Do Enough
As six major banks and federal officials announced a relief plan today for delinquent homeowners, critics were already saying that the Project Lifeline program doesn’t do enough to help those struggling to make their payments.
Under the program, banks will send letters to those who are more than 90 days delinquent, giving them 10 days to respond and “pause” the foreclosure process for a month while possible workout options are discussed, according to Bloomberg.
This is a broader effort to help delinquent borrowers than previous programs, in part because it isn’t restricted to those with subprime mortgages, notes the Wall Street Journal (sub. req.). However, there are still restrictions: “Homeowners wouldn’t qualify for the program if they are in bankruptcy, if they already have a foreclosure date within 30 days or if the loan was for an investment or vacant property,” the newspaper writes.
Meanwhile, news accounts are sketchy about what workout options actually will be offered to delinquent borrowers.
One expert offered a solution last week, Bloomberg reports: “These borrowers need to be refinanced into fixed-rate affordable loans,” said Jim Carr, chief operating officer of the National Community Reinvestment Coalition. As discussed in an earlier ABAJournal.com post about Project Lifeline, some critics also are saying banks should reduce the principal balance on delinquent mortgages to reflect the current fair-market value of the homes.
The U.S. is experiencing a huge increase in mortgage foreclosures, which has been attributed to lax lending practices and subprime mortgages that became commonplace in recent years.
As discussed in earlier ABAJournal.com posts, many subprime mortgages are at adjustable, rather than fixed interest rates, and may also incorporate features such as artificially low initial payments and much higher interest rates than borrowers with good credit pay. As a result, subprime borrowers may face huge increases in their monthly payments within a few years. Contrary to traditional lending practices, banks in recent years also have often not required borrowers to prove their income or even make an initial down payment. Consequently, they may not have any equity in their homes, now that housing values are falling throughout the country, and hence lack a strong financial incentive to struggle to make payments.
U.S. Treasury Secretary Henry Paulson said today in a press conference about Project Lifeline that he expects the situation to worsen, reports CNN Money.
“In terms of subprime, the worst is just beginning,” he said. “The loans resetting over the next couple of years, that vintage was done under the most lax underwriting standards.”
Ironically, falling real estate values may help some struggling homeowners, especially those with equity lines that exceed their home’s fair-market value: lenders may simply walk away from the loan, rather than foreclose, because they gain nothing financially by doing so, reports the Wall Street Journal, in an earlier article.
