Foreclosure prevention programs not working

Studies have shown that it is cheaper for the lenders to adjust terms rather than to foreclose.

The government has set standards for loan modifications that lenders can use, such as no more than 31% of the household income should go to payments.

They have offered incentives to lenders in the form of cash payments when they modify mortgages rather than foreclose.

They have set up a national group of foreclosure prevention counselors that work to modify mortgages for nothing.

All this has been done, and little has been accomplished. The Wall Street Journal says that an estimated 200,000 people have been helped, which sounds like a lot, until you realize that the government modification plan should help an estimated three to four million borrowers.

There are many reasons this has gone so badly. The lenders are actually "servicers" who work for the companies who bought the mortgages, so they lose nothing if they foreclose. They know how to foreclose, and they have staff to do it, They do not know how to modify mortgages and they do not have staff to do it. The incentives offered for modification are not that good, and they get paid to foreclose.

To me this program was set up to fail when the Senate killed a bill that would have allowed bankruptcy judges to reduce the principle on ("cram down") residential mortgages. No one likes to go to bankruptcy court but if you can save your house, you might be willing to do it.

If the lenders know that the person on whom they are foreclosing can get a loan modification from a judge, they would be much more likely to do it themselves. This would be better for everyone.

Bankruptcy courts can now cram down second mortgages, mortgages on second homes and investment properties. They can even cram down the mortgage on your yacht -- if you own one. Yet they cannot help you stay in your own home when foreclosure threatens.

Written by Jack Edmonston
http://www.askjackaboutdebt.com/