Foreclosures: What the Government is Trying to do to Help

Barack Obama proposes to place 3 months moratoria on foreclosures for home owners, so that in that time, the banks will not be able to exercise any foreclosure action against home owners. One of the government’s concerns is to permit tenants in rental properties to remain in their homes which bring market pressure to bear on owners and directly or indirectly encourage loan modifications and restructurings. Tenants affected by their landlords’ situation will also have more time to make arrangements to relocate, if necessary. Additionally the U.S. Treasury Department would buy many of those bad mortgage loans from banks at the actual value of the property, not at the original (and inflated) value of those loans. This means that investors who buy foreclosed properties have more choices and at lower prices than ever before.

The United States Department of Housing and Urban Development is assisting homeowners in foreclosure troubles by offering the services of the HUD-approved housing counseling agency who are offering advice and information regarding programs from government agencies and private entities that can provide relief for many homeowners.

There are billions of dollars of private funds available to purchase distressed properties, but much of these funds have not been activated yet because potential sellers are unwilling to take the losses resulting from the lower prices that potential purchasers are seeking for these properties in foreclosure. To maximize the return to taxpayers and the need to minimize losses to selling institutions there is significant pressure to balance the demand.

The eligibility requirements for the Foreclosure Prevention Act (FPA) of 2008 include more than just the homeowners’ monthly income and expense. But, it is usually the debt-to-income (DTI) ratio (the same DTI ratio that was relaxed by encouragement from some in government, like Senate Banking Committee Chairman senator Chris Dodd, and Chairman of the House Finance Committee congressman Barney Frank, who pressured Fannie Mae and Freddie Mac to relax their restrictions to help more people become homeowners) that precludes many of those who would otherwise qualify from obtaining government assistance within such programs. With the FPA the legislation actually prevents homeowners who truly need help from qualifying for it. Many argue that the loans to those that do not meet the requirements of DTI ratios should never have been loaned the money in the first place, and that it is the lenders’ fault for relaxing the requirements for the original loans made to so many homeowners now in default.

For subprime loans (many mortgages having been originated with a second mortgage to begin with, known as 80/20 loans), borrowers required a DTI ratio above 31%, meaning that the amount they were spending on their debt (for housing, autos, and otherwise) must have been at least 31% of their gross income (income before taxes). For homeowners who obtained subprime loans, this will be an easy requirement to meet, but for those families who made conservative housing choices with affordable payments and then ran into a financial setback like a job loss or unexpected expenses like an accident or costly injury for example, this requirement could prevent them from obtaining assistance, as they did too well of a job of managing their finances; a slap in the face to those that met conventional loan approval and were innocent of the subprime debacle.

To receive assistance from the government, homeowners must prove that they can no longer make the payments on the loan as it is currently structured. They may be current now or in default of the mortgage, but they must prove to the regulators that they are not applying for federal assistance just to receive a lower monthly payment. Obviously, anyone applying for help is seeking lower monthly payments to prevent foreclosure, and it will be up to the government to determine if they are able to make the restructured loan payment.

Also, any second mortgage or home equity line of credit on the house would have to be paid off or removed somehow before refinancing the foreclosed property. The owners would not be able to obtain a new second mortgage except for purposes of necessary upkeep for five years. Since many of the subprime mortgages were originated with a second mortgage to begin with, this requirement will effectively prevent thousands of families from receiving federal assistance.

Foreclosures are increasing as more people are unable to service the debt on their homes. The government cannot move fast enough to help many of these individuals, further driving down the values of homes. Together with the massive job losses of 2008, the future of foreclosures will increase, at least in the short term.