The New York Times has posted an article about the Obama administration’s new anti-foreclosure plan that will (hopefully) prevent many more foreclosures and do more to prevent housing prices from continuing to decline.
The improved plan addresses many issues the first plan didn’t take into consideration. For example, the first plan focused on reducing troubled homeowners’ mortgage payments, ignoring the fact that unemployed homeowners probably can’t make the reduced payment to begin with and that “underwater” homeowners (those that owe more than their home is worth) don’t really have any motivation to keep up with payments, even reduced ones. Also, the whole program was voluntary for homeowners.
Under the new plan…
borrowers receiving unemployment benefits, lenders will be required to lower payments to no more than 31 percent of gross income for at least three months, provided the borrower is not more than 90 days’ delinquent. Unpaid amounts will be added to the loan’s principal, to be repaid later. After several months, the hope is that the borrower will have found new work and will qualify for a loan modification in which payments will stay at the reduced amount.
For borrowers “deeply underwater” lenders will be “required to consider reducing the loan’s principal.” They will be encouraged to do the same thing for homeowners up to date on payments as well.
If lenders participate in the new plan it can prevent about 1.5 million foreclosures from now until 2012 versus just 650,000 under the old plan.
Many foreclosures will also be delayed, though not ultimately prevented, as lenders assess whether borrowers qualify for help under the new plan. Taken together, preventing and postponing foreclosures would help stabilize house prices in the near term and thus reduce the threat that foreclosures pose to the nascent economic recovery.
Foreclosures will still continue to be a problem, however. While this should save 1.5 million homes, about 3.6 million homes are estimated to be foreclosed on in the next 2 years even with this new plan.
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