U.S. Legislation: Foreclosure Relief Economy

¶ … U.S. legislation: Foreclosure relief

economy may be improving and shedding fewer jobs, but that is little comfort for Americans in danger of losing their homes. At the end of September 2009 "a record 14.4% of borrowers were either in foreclosure or delinquent on their mortgages" in America, and these figures have altered little, despite the government program created to aid such bereft individuals (Morgenson 2009). According to Gretchen Morgenson's December 5, 2009 article "Why Treasury needs a Plan B. For mortgages" in the New York Times, the cautious program created by the Obama Administration under the watch of Treasury Secretary Timothy Geithner is at least partially to blame for the lack of financial relief for homeowners.

When the U.S. government made the decision to 'bail out' the nation's banks, many expressed outrage that the government was extending aid only to financial institutions, rather than homeowners facing foreclosure. The Treasury Department responded with a $75 billion loan modification plan that was intended to help make homeowner's monthly payments more manageable by reducing the interest rates. However, in the past"70% of modifications involving only interest rate cuts, rather than reductions in the principal borrowers owe, have failed after 12 months," thus success for the Treasury Department's program seems unlikely (Morgenson 2009). It is uncertain, analysts say, why such a strategy was adopted given that "according to government investigators, the average monthly mortgage payment for a borrower under early plan modifications fell by 34%" (Morgenson 2009). Past data on loan modifications that cut payments by 34% indicate that 65% of borrowers fell back into delinquency.

This indicates that the Treasury Department had substantial evidence that its program would be ineffective yet persisted in putting forth a policy for borrowers weathering an even more difficult economic climate than the one in which the dismal data had been collected. Of course, merely because a program was ineffective in the past does not automatically mean it will be ineffective for homeowners today. But Morgenson suggests even more troublingly, that the fundamental assumption of affordability behind the new program is flawed: "in devising what it considers an affordable mortgage payment, the program doesn't account for all of a borrower's debts -- the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower's first mortgage payment, insurance and property taxes" (Morgenson 2009).

The program may even hurt those borrowers with second liens: "These banks -- the very same companies the Treasury is urging to modify loans that they service -- have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets. Say a troubled borrower has a first mortgage owned by a pension fund in a securitization trust and a second lien held by the bank that services the loans. The servicer is happy to modify the first mortgage under the Treasury program because the pension fund holding that loan takes the biggest hit while the second lien is untouched" (Morgenson 2009).