March 2, 2008
As houses foreclose in many parts of the country faster than they are sold, many homeowners struggling to make their mortgage payments find that it is much easier to simply walk out of their homes. Since their property values are only going down, the option to refinance is not possible. So their resolution seems more logical than to continue to barely make payments in order to delay the inevitable.
Late, but eventually, many policy makers have realized that the cause of the deteriorating American economy is due in great part to subprime borrowing and predatory lending. And in order to avoid the looming recession, there have been many attempts to keep the troubled homeowners to stay in their homes.
Treasury Secretary Henry Paulson and banks representing half the U.S. mortgage market agreed to offer 30-day freezes on foreclosures, acknowledging the need for a stronger response to the worst housing slump in a generation. (Bloomberg)
The 30-day freeze program, dubbed Project Lifeline, is an effort to give the distressed borrowers additional time to modify their loans with their loan servicer to a more affordable monthly payment.
But the attempts proves to be futile. And the foreclosure rates continue to climb at record high levels.
During January, it was reported this week by RealtyTrac, there were 153,745 initial foreclosure notices sent out in the United States. That dwarfed the 43,000 total sales of newly built single-family homes and amounted to nearly half the total sales figure, which includes sales of existing homes and condominiums. (NYT)
But one of the latest proposals could very well be the light at the end of the tunnel. Office of Thrift Supervision Director John Reich proposes the most viable plan yet yesterday on Capitol Hill.
Under the OTS proposal, homeowners would be able to refinance their mortgages at the current market values, with the lenders getting “negative-equity certificates” to be redeemed once the home is sold.
Negative-equity certificates may help servicers limit their losses and avoid an “avalanche of borrowers who choose to walk away from the mortgage,” Scott Polakoff, the OTS senior deputy director, said yesterday. The Federal Housing Administration could help homeowners refinance, he said. (Bloomberg)
Essentially, the troubled borrower can refinance his or her house at current market value — which likely is lower than when the house was initially purchased — during which time the OTS will agree to cover the difference. The difference is what is here being referred to as “negative-equity certificates.”
When it eventually comes time to sell the home — ideally when the home value rises above the initially bought price — the negative-equity certificates will be redeemed by the OTS.
This plan seems to be the most viable of all laid out on a grand scale. It’s not a hand out, because it’s not asking the government to purchase the mortgage directly. It simply allows the homeowners to modify their loan while remaining in their homes with dignity.
The plan is at its infancy stage and only time will tell if it’ll come to fruition over the course of the next few weeks.