If It Ain't Broke, Don't Fix It!!

Yet another product of our faltering economy is the rise in the rate of foreclosure throughout the country. But how do we go about fixing it? I don’t know about the rest of you, but I support the concept of extended terms and reduced interest, as opposed to billing me, the taxpayer, for the bailout.

According to Consumeraffairs.com, foreclosure filings have been logged for 261,255 homes across the U.S., a 48% increase from May of last year. Exhibiting typical bureaucratic expediency, the Bush administration waited until last week (November 11th) to roll out a loan modification plan which, besides the delay in implementation, I have no qualms with. The program is designed to keep borrowers current on their payments by extending the loan term and reducing interest. In the event a borrower has missed several payments in a row, loan servicers also have the option to temporarily forgive the principle owed and add it onto the back of the loan, essentially restarting the borrower’s month to month but not completely forgiving said debt. Under strict guidelines imposed by the FHFA (Federal Housing Finance Agency), lenders who cannot restructure the payment schedule will be required to re-evaluate the borrower’s situation, most importantly the borrower’s personal income.

The FDIC proposed a similar plan, but thankfully Bush and the powers that be stomped it into the dust. Under the FDIC plan, the government would provide lenders $1,000 to cover modification expenses and also pledge to insure 50% of the rebuilt loans should they re-default in the future. This plan may have worked when our dollar was still valuable, but at this point the only way to implement the FDIC scenario is to heavily tax the United States populace. Inman predicted that if 1 in 3 of the modified loans were to re-default, it would in turn cost us taxpayers $24.4 billion.

That was a close one. Fortunately, Bush’s plan does not simply provide loan servicers with tax money, but instead will issue such institutions several guidelines/procedures to follow when refinancing and will require them to be implemented no later than December 15 of this year.

Are there any of you out there that instead favor FDIC’s proposal? Some would cite the seemed blind eye turned toward loans owned by Freddie Mac and Fannie Mae as reason enough, but in reality these loans only represent 20% of delinquent borrowers. According to FHFA Director James Lockhart, “Some 60 percent of seriously delinquent mortgages have been sliced and diced and sold to investors in private-label mortgage-backed securities.” In fact, Mac and Mae have already been extremely productive: from January to August of this year, the institutions have been responsible for a collective 36,847 loan modifications.

Luckily, some private institutions have also taken the hint and started their own independent modification program. JP Morgan Chase released that they have, since early 2007, prevented nearly 250,000 loans from defaulting by restructuring payments and terms. Numbers don’t lie, and these numbers are telling me that we should continue to implement strategies that have been proven to keep homeowners out of foreclosure, instead of potentially costing American taxpayers $50 billion.