Wednesday, November 12, 2008

Revamped Foreclosure Alternatives—Can the Buyer Pay Back the Money?

Simple question. Granted, had it been asked when many initial loans were taken out and the answer acted responsibly on, we might not be in the mortgage mess that our economy finds itself today. It seems the question is being finally being asked again. Not only to new borrowers, but a modified question, “HOW can the buyer pay back the money?”, is being asked to assist homeowners at risk of foreclosure.

Earlier this week, I read a Newsweek article posted by Daniel McGinn,
Focusing on Foreclosures. In the article, McGinn discusses how after the summer takeover of IndyMac, the FDIC introduced a loan modification program that looks at a homeowner’s current situation and what they are able to pay first, then tweaks the loan to keep the homeowner in their house. Note they first look at what the homeowner can pay. Then using a standard formula, they try to set up a payment that will not exceed that amount. This starts by lowering the interest rate or extending the length of the loan. If that doesn’t work, the principle of the loan could be decreased.

While this does cause a loss to the bank on the books, it is in many cases a much lower lost than the cost of foreclosing on the home. And as most people now realize, the total impact of the loss is not just for the bank, many others are affected starting with the homeowner and extending throughout the community.

Finally, things are starting to snowball in a good way. Early yesterday, Citibank announced an expanded moratorium on foreclosures. By the afternoon, the FHFA was announcing an expanded Fannie Mae/Freddie Mac program to keep more people in their homes by reducing there payments to not more than 38% of their gross monthly income. 

While questions the logic of the bailout continue to swirl, I do think banks working to keep homeowners in their houses on affordable payment schedules does make sense. Too bad this simple question wasn’t asked sooner and consistently.
CLICK HERE for additional information on HUD Foreclosure Assistance.

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